INVESTMENT LAW CASES Table of Contents

1. Incorporation and Its Effect ....................................................................................4

1.1. Cases (alphabetical order) ...................................................................................................................... 4
Creasey v Breachwood Motors Ltd ..................................................................................................................................4
Gilford Motor Co Ltd v Horne .........................................................................................................................................4
Green v Bestobell Industries Pty Ltd ................................................................................................................................5
Lee v Lees Air Farming Ltd ............................................................................................................................................5
Macaura v Northern Assurance Co Ltd ............................................................................................................................5
Salomon v Salomon & Co Ltd ..........................................................................................................................................6

3. Companys Constitution and Replaceable Rules ....................................................7

3.1. Cases (alphabetical order) ...................................................................................................................... 7
Ashbury Railway Carriage & Iron Co v Riche (16.e p.107) ......................................................................................7
Eley v Positive Government Security Life Assurance Co [16.e p.111] [4.105] ......................................................7
Hickman v Kent or Romney Marsh Sheep-Breeders Association [16.e p.110] [4.90] ..........................................7

5. Duties of Directors..................................................................................................8
5.1. Cases (alphabetical order) ...................................................................................................................... 8
ASIC v Adler ....................................................................................................................................................................8

ASIC v MacDonald

ASIC v Rich ...............................................................................................................................9

Boston Deep Sea Fishing & Ice Co v Ansell ..................................................................................................................10

Daniels v Anderson .........................................................................................................................................................11
Darvall v North Sydney Brick & Tile Co Ltd ................................................................................................................16
Equiticorp Finance Ltd (in liq) v Bank of New Zealand ................................................................................................17
Howard Smith Ltd v Ampol Petroleum Ltd ...................................................................................................................19
Marquis of Butes Case (Abolished) ...........................................................................................................................20
Mordecai v Mordecai ......................................................................................................................................................21
Parke v Daily News Ltd ..................................................................................................................................................22
Paul A Davies (Aust) Pty Ltd v Davies ..........................................................................................................................23
Re City Equitable Fire Insurance Co Ltd (Abolished) ................................................................................................24
Ring v Sutton ..................................................................................................................................................................25
Thomas Marshall (Exporters) Ltd v Guinle ....................................................................................................................26
Walker v Wimborne........................................................................................................................................................27
Whitehouse v Carlton Hotel Pty Ltd...............................................................................................................................29

9.B. Dividends ..........................................................................................................30

9.B.1. Cases (alphabetical order) ................................................................................................................ 30
Burland v Earle ...............................................................................................................................................................30

10. Minority Protection and Oppression Remedy .....................................................31

10.1. Cases (alphabetical order) .................................................................................................................. 31

Foss v Harbottle (Abolished) .......................................................................................................................................31

Re Tivoli Freeholds Ltd ..................................................................................................................................................32
Sanford v Sanford Courier Service Pty Ltd ....................................................................................................................33

This page is intentionally left blank.

Vn bn ny ch thng k li mt vi cases c cp ti trong Slides ca Investment Law.

[16.e p.453] [13.4.45, 13.4.50]

A director with special skills or experience in the companys business has a duty to give the company the benefit of that skill or
experience, and will not be able to avoid liability by merely relying on the companys executive directors and officers, derived from
the case Gold Ribbon Pty Ltd v Sheers (a case in which a director with extensive lending experience failed to ensure that the
scheme was set up to comply with accepted lending practice to minimize the risk of borrowers defaults).

1. Incorporation and Its Effect

1.1. Cases (alphabetical order)
Creasey v Breachwood Motors Ltd
(16.e p.43)
In Creaseys case, the court lifted the corporate veil and held that Breachwood Motors Ltd (BM) the new company
was liable for wrongful dismissal to Creasey (an employee) of the old companys (Welwyn Ltd (WL)), when WLs
employers shut down their company, and transferred its business and assets to BM the sham company, to avoid the
legal obligation of paying Creaseys claim.

Gilford Motor Co Ltd v Horne

(16.e p.42)
In Gilfords case, Horne was an ex-employee of Gilford Motor under a contractual obligation not to solicit business from
the customers of ex-employer. When he set up a company (with his wife and associate as shareholders) and solicited
business under the company name, his company was sued by Gilford Motor; and the court held that his company was a
mere cloak or sham used to avoid the contractual obligation. The court granted an injunction against Horne and his
company, although his company did not contracted with Gilford Motor.

Green v Bestobell Industries Pty Ltd

(16.e p.43)
In Greens case, Green was a director of Bestobell, then he set up his own company (Clara Pty Ltd), and this company won the tender
for construction works in competition with Bestobell. The court held that Green breached his duty to Bestobell by having conflicting
interest with Bestobell, and Clara must account for the profit derived from Bestobell, due to participating in Greens breach. It was
concluded that the court would lift the corporate veil if a company knowingly participated in a breach of directors duties.
Lee v Lees Air Farming Ltd
(16.e p.35)
In Lees case, Lee formed a one-person company, controlled by him. Lee was also employed by that company. When Lee was killed
during work, his widow claimed for compensation under the insurance contract between Lee and the company. The court held that a
one-person company was a separate legal entity from its controller who might also be its sole employee. Thus, Lees widow was
entitled to be paid out under the insurance contract.
Macaura v Northern Assurance Co Ltd
(16.e p.36)
In Macauras case, Macaura took out insurance for his property (timber) against loss by fire in his own name, and then sold the
property to a company which was owned almost solely by him. He had not transfer the insurance policy to the company. When his
property is destroyed by fire, the insurance company refused his claim for compensation. The court held that no companys
shareholder, even the single shareholder of a one-shareholder company, has any legal or equitable interest in the companys property.
Thus, Macaura had no insurable interest in the destroyed property.

[Shareholders only own shares in the company.]

Salomon v Salomon & Co Ltd

(16.e p.33)
In Salomons case, Salomon was a boot manufacturer who sold his business to a proprietary company which was owned
almost solely by him. When his company began to struggle, Salomon lent his own money to the company, and received
debentures secured by a charge on its assets. When his company became insolvent, its unsecured creditors argued that the
company and Salomon were one and the same, claiming that his debentures were void since a man could not be a creditor
of himself. The court held that a company was a separate legal entity distinct from its directors and shareholders, and able
to own properties, to enter into contracts, and to sue or be sued in its own name. Thus, Salomon got priority over
unsecured creditors.
<<Derived from the doctrine of separate legal entity, typically represented by Salomons case, it is concluded even though
a single person manages and controls a company as well as owns all of its shares, that person will not be automatically
liable for the companys debts and obligations, if there is no grounds for lifting the corporate veil.>>
[16.e p.34]
<<A one-person company may borrow money from its controller on a secured basis who will obtain priority as a secured
creditor and rank ahead of its unsecured creditors on the companys insolvency.>>
However, there is an exception of the principle in Salomons case that, if the company is used as a sham to avoid a legal
obligation under contract or statue, the court will lift the corporate veil, and force it and its members be liable for that
obligation.

3. Companys Constitution and Replaceable Rules

3.1. Cases (alphabetical order)
Ashbury Railway Carriage & Iron Co v Riche (16.e p.107)
Historically, derived from Ashbury Railway Carriage & Iron Co v Riche case, Ultra Vires rule (beyond the companys power) said that any
contracts or transactions outside the scope of companys objects are void. Now, Ultra Vires rule is abolished by s 125. If contracts or transactions
of a company are outside its objects, they are still valid.
Eley v Positive Government Security Life Assurance Co [16.e p.111] [4.105]
In Eleys case, Eley was a companys member because he received an allotment of companys shares in consideration of his work. The companys
constitution provided that Eley was to be its permanent solicitor and could only be dismissed for misconduct. There was no employment contract
between Eley and the company. When the company ceased to employ Eley, he sued the company but he failed, because being the companys
member did not mean that Eley had the right to be the companys permanent solicitor. It was concluded that members could not enforce the
constitutions provisions conferring on them the rights in a capacity other than as a member (e.g. right to be solicitor in Eleys case).
Hickman v Kent or Romney Marsh Sheep-Breeders Association [16.e p.110] [4.90]
In Hickmans case, Hickman was obliged to refer his disputes over various irregularities in the affairs of the association to arbitration, rather than
going to court, according to the associations constitution. It was concluded that only those provisions in a constitution or replaceable rules
conferring rights on members in their capacity as members are enforceable as a contract

(e.g. right to have votes counted at general meetings,

derived from Pender v Lushington case ; right to enforce payments of declared dividends, derived from Wood v Odessa Waterworks Co
case ).

5. Duties of Directors
5.1. Cases (alphabetical order)
ASIC v Adler
(16.e p.236, 397, 422, 461)
Facts:

Rodney Adler was one of the directors of HIH.

A subsidiary of HIH provided an unsecured $10 million loan to Pacific Eagle Equity Pty Ltd (PEE) a company of
which Rodney Adler was a sole director.

By use of a trust mechanism, approximately $4 million was used by Adler to acquire HIH shares to prop up share
prices, venture capital unlisted investments were purchased from another Adlers company (Adler Corporation Ltd),
and loans were made to entities which were associated with Adler.

These transactions occurred without any board or member approval and disclosure the loans were given without
proper documentation or security being sought and the payment was made so that it would not come to the attention of
other HIH directors.

Held:

Adler was held to breach:

Duty to act with due care and diligence (under s 180); and

Duty to act in good faith and for a proper purpose (under s 181); and

Duty not to improperly use position (under s 182); and

Duty not to improperly use information (under s 183).

Adler was banned for 20 years from acting as a director and fined $450,000.

In ASIC v Adler case,

ASIC v MacDonald

ASIC v Rich

(16.e p.463)

(16.e p.307, 367, 450, 454, 466, 467, 468)

Facts:

Phc tp rc ri, v khng cn tm tt li

Held:

Phc tp rc ri, v khng cn tm tt li

Boston Deep Sea Fishing & Ice Co v Ansell

(16.e p.424)
Facts:

Ansell the managing director of Boston organized the construction of fishing boats on its behalf.

Unknown to his company, he was paid a commission by the shipbuilders, and was also paid bonuses by an icesupplying company and a fish-carrying company, due to their contracts with Boston.

Held:

The court held that Ansell had breached his fiduciary and statutory duties to Boston, due to his undisclosed personal
profits.

[16.e p.424]
Derived from Boston Deep Sea Fishing & Ice Co v Ansell case, bribes and secret commissions are examples of
undisclosed personal profits of directors when they are confidentially rewarded for conducting particular transactions
relating to their company.

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Daniels v Anderson
(16.e p.134, 351, 352, 449, 451, 452, 453, 455, 456, 458, 465, 468, 528, 599, 600, 601, 602)
[16.e p.451, 452, 453] [13.4.40]
Facts:

AWA allowed a middle level manager Koval to handle AWAs trading on the foreign exchange (FX market).

Koval concealed losses of $50 million on FX transactions from AWAs senior executives, when carrying out
unauthorized borrowings.

The AWAs auditor Daniels failed to detect those borrowings. Although warning AWAs board about the
inadequacies of companys internal controls over FX activities to, the auditor failed to stress the seriousness and
urgency of the matter.

AWA sued Daniels and his firm for negligence in failing to report the deficient internal controls over FX activities.

The auditor then counter-sued AWAs board (including both executive and non-executive directors) for contributory
negligence.

Held:

The court held that:

The auditor was negligent; and

AWAs executive directors were also negligent; and

AWAs non-executive directors were not negligent.

Executive and non-executive directors have different standards of care:

Non-executive directors are only expected to decide on matters of policy, not day-to-day running of business. They

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are not liable for corporate management failings, because they are not paid, only attend a board meeting every
month, etc.

Executive directors are subject to a higher standard of care than non-executives, by reason of their contractual
employee status.

In Daniels v Anderson case,

[16.e p.134] [5.100]

A company was awarded damages arising from the negligence of its auditors. The auditors obtained a deduction of damages due to the
companys contributory negligence. It was held that the negligent acts of management should be treated as acts of the company for the
purposes of a finding of contributory negligence.
This conclusion was reached on two grounds. The company was vicariously liable for the negligence of its management. It was also
liable because its directors almost wholly delegated the task of setting up and operating a foreign exchange operation to management
and failed to monitor and control this operation.
[16.e p.455] [13.4.65]
Derived from Daniels v Anderson case, all directors, whether executive or non-executive, must take reasonable steps to put
themselves in a position to guide and monitor the companys management.
[16.e p.456] [13.4.80]

12

The court held that the AWAs chief executive officer breached his duty to act with reasonable care because he failed to make
inquiries of the companys senior executives that would have led to a better appreciation of the risks and dangers of the foreign
exchange dealings. As the companys chief executive officer, he was under a continuing obligation to supervise management and seek
satisfactory explanations regarding the deficiencies of the foreign exchange trading system and procedures.
[16.e p.458] [13.4.100]
Derived from Daniels v Anderson case, all directors, whether executive or non-executive, must have abilities to read and
understand the companys financial statements, and be familiar with the companys financial position.
[16.e p.599] [16.150]
The court held that the auditors breached their duty to act with due care and skill and was negligent, by failing to report the absence of
proper accounting records and weaknesses in internal controls to the companys management. If the management did not take prompt
action, the auditors should report the deficiencies to the board of directors.
[16.e p.352] [13.0.120] ; [16.e p.452, 453] [13.4.40]
Derived from Daniels v Anderson case,
The court imposed different standards of care, skill and diligence on different types of directors, including executive and nonexecutive directors. For executive directors, they are full-time employees and to involve in daily management of the companys
business, and hence their responsibilities to the company require higher standards. For non-executive directors, they are part-time
employees and not required to involve daily management of the companys business, and hence, their responsibilities to the company
require lower standards.

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Directors, whether executive or non-executive, must take reasonable steps to put themselves in a position to guide and monitor the
companys management.
1. Directors must become familiar with the companys business when they join the board;
2. While directors need not have equal knowledge and experience of every aspect of the companys activities, they are under a
continuing obligation to make inquiries and keep themselves informed about all aspects of the companys business operations;
3. Directors, whether executive or non-executive, must also be familiar with their companys financial position by regularly
reviewing its financial statements as they will be unable to avoid liability for insolvent trading by claiming that they do not
know how to read financial statements;
Directors, whether executive or non-executive, must have abilities to read and understand the companys financial statements,
and be familiar with the companys financial position.
4. Directors who are appointed because they have special skills or experience in an aspect of the companys business must also
pay attention to other aspects of the companys business which might reasonably be expected to attract inquiry even if this is
outside their area of expertise. They must ensure that the board has the means to monitor management so as to satisfy
themselves that the company is being properly run;
5. Directors are allowed to make business judgments and take commercial risks. However, they cannot safely proceed on the

14

basis that ignorance and a failure to inquire are protection against liability for negligence;
6. Directors cannot shut their eyes to corporate misconduct and then claim that they did not see the misconduct and did not have a
duty to look.

[16.e p.453] [13.4.45, 13.4.50]

A director with special skills or experience in the companys business has a duty to give the company the benefit of that skill or
experience, and will not be able to avoid liability by merely relying on the companys executive directors and officers, derived from
the case Gold Ribbon Pty Ltd v Sheers (a case in which a director with extensive lending experience failed to ensure that the
scheme was set up to comply with accepted lending practice to minimize the risk of borrowers defaults).

15

Darvall v North Sydney Brick & Tile Co Ltd

(16.e p.237, 345, 382)
Facts:

KHNG tm ra ngun thng tin c th v case ny tm tt ni dung

Held:

KHNG tm ra ngun thng tin c th v case ny tm tt ni dung

In Darvall v North Sydney Brick & Tile Co Ltd case, the court held that directors must have regard to both the
interests of present and future shareholders as well as the interests of the company as a commercial entity.
However, directors may act in what they reasonably consider to be the best interests of the company as a
commercial entity even though this may not be in the short-term interests of shareholders.
In Darvall v North Sydney Brick & Tile Co Ltd case, a joint venture had been allegedly entered into for the
purposes of defeating a takeover bid. The trial judge had found that the directors would not have entered into the
joint venture but for the fact of a takeover bid, although they alleged that the joint venture agreement was in the
best interests of the company and of its present shareholders.

16

Equiticorp Finance Ltd (in liq) v Bank of New Zealand

(16.e p.45, 387)
Facts:

Equiticorp Holdings Ltd (EHL) is a big corporate group, with 140 subsidiaries. Uruz Pty Ltd (U), Equiticorp Finance
Ltd (EFL) and Equiticorp Financial Services Ltd (EFSL) are 3 subsidiaries of EHL.

U got a loan from Bank of New Zealand (BNZ). BNZ requested EFL and EFSL to repay. Then, EFL and EFSL
became insolvent.

The legal issue arising here is whether the directors of EFL and EFSL breached their duties to act in good faith in the
best interests of their companies.

Held:

The court applied the objective test, which is whether an intelligent and honest person in the position of the
director could, in the whole of the existing circumstances, have reasonably believed that the transactions were
for the benefit of the company.

The court held that there was no breach of directors duties because:

There was interdependence within the group. Here, the welfare of the group was intimately tied up with the
welfare of individual companies, due to inter-company guarantees: if a holding company has not paid debts, the
whole group would have collapsed.

The transaction benefited U directly, but had derivative benefits for EFL and EFSL as well. The alternative was a
possible disaster for the whole group including the two companies. Anyway, even though the group collapsed, but
the important time is when the decision was made; it was made in order to avoid collapse.

17

There is no need to (too stringently) ask whether directors (subjectively) actually gave separate consideration to
the interests of the company, not just the group. Anyway, the transaction might be beneficial to the company.
Breach should not flow from this if it is objectively beneficial.

Source:
http://books.google.com.vn/books?id=xkpGOejbYwYC&pg=PA263&lpg=PA263&dq=Equiticorp+Finance+Ltd+(i
n+liq)+v+Bank+of+New+Zealand&source=bl&ots=DI3ivUzyHb&sig=1OmdgwNrgsACfHkQ7RjFwdrJ_zE&hl=en
&sa=X&ei=5YJaUf60HYSaiAePi4Bw&ved=0CDIQ6AEwAg#v=onepage&q=Equiticorp%20Finance%20Ltd%20(
in%20liq)%20v%20Bank%20of%20New%20Zealand&f=false

In Equiticorp Finance Ltd (in liq) v Bank of New Zealand case, the court held that the provision of funds from the
subsidiary to pay debts owed by other companies within the group was not a breach of directors duties because the
financial stability of the group provided a benefit to the subsidiary.
Source:
http://lexisnexis.com.au/aus/academic/text_updater/documents/harrisch16.pdf
Ctrl + F, search Equiticorp Finance Ltd (in liq) v Bank of New Zealand

18

Howard Smith Ltd v Ampol Petroleum Ltd

(16.e p.392)
Facts:

This case involved the takeover battle for control of R W Miller (Holdings) Ltd.

Ampol Petroleum (A) and Bulkships Ltd (B) controlled 55% of Millers issued capital. They made a joint takeover bid for all other
Millers shares.

Howard Smith (HS), which was friendly to Millers board, also made a takeover bid offering a higher price.

The board recommended shareholders to accept HSs offer. However, A and B announced that they would not sell their shares to HS.

The board decided to issue extra shares to HS, to reduce A-Bs majority shareholding into a minority position.

A and B argued that the decision to issue shares to HS was motivated by an improper purpose, whereas the board argued that the
company was in urgent need of funds.
Held:

The court held that the primary purpose of the Millers share issue was to reduce A-Bs shareholding so that HS could succeed in the
takeover bid.

Thus, the Millers board had breached their duty and the share issue to HS was invalidated.
[16.e p. 347, 390, 391, 392]
In Howard Smith Ltd v Ampol Petroleum Ltd and Ngurli Ltd v McCann case(s), when considering both the objective purpose for which
the power was granted and the purpose which actually motivated the exercise of the power, the court held that the directors power to issue
shares must not be used under the cloak of actually motivating purpose of benefiting some shareholders or their friends at the expense of
other shareholders, to help them wrest or destroy the control of the company from other shareholders.

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Marquis of Butes Case (Abolished)

(16.e p.465)
Facts:

KHNG cn tm tt ni dung case ny

Held:

KHNG cn tm tt ni dung case ny

In Marquis of Butes Case, the Marquis of Bute was appointed president of a bank at the age of six months. Losses arose
from irregularities in the banks operations but the Marquis was not held liable despite having attended only one board
meeting in 38 years.

20

Mordecai v Mordecai
(16.e p.427, 437)
Facts:

Joseph (J), David (D) and Meyer (M), were directors of Morpack Packaging Pty Ltd (MPPL).

J and D each held 50% of shares in MPPL.

J separated from his wife, and after his death, his will deliberately left all his shares to D and M as trustees for his
infant son, excluding his wife.

Then, D and M closed down MPPL, and set up a rival company taking over all Morpacks customers.

Js wife, on her sons behalf, claimed damages from D and M.

Held:

The court held that D and M had breached their directors duties by taking up a corporate opportunity that should have
gone to Morpack.

[16.e p.437]
Derived from Mordecai v Mordecai case, directors are prohibited from competing with their company where this
involves them closing down the companys business and operating it for themselves.

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Parke v Daily News Ltd

(16.e p.388)
In Parkes case, the directors sold one of two companys newspapers and proposed to distribute surplus sale proceeds among its
employees by way of compensation for dismissal. The shareholder challenged this proposed action, and the court held that the
directors must not consider the employees interests at the expense of the shareholders interests. Such consideration was held to be
not in the companys best interests (the shareholders best interests as a collective group), and also not a proper use of the companys
funds.
<<In Parkes case, it was concluded that bonus payments to employees as compensation for their dismissal following a sale of the
companys business was not in the companys best interests (the shareholders best interests as a collective group), and also not a
proper use of the companys funds.>>
<<Moreover, majority of shareholders are not entitled to ratify the decision to pay compensation to employees.>>
[16.e p.388] The company may provide extra benefits to employees but only if that delivers a benefit to the company. If the employees
continue to work for the company, bonus payments to them can serve the companys interests, because its industrial relations can be improved.
[16.e p.388] As long as directors do not disregard the shareholders interests entirely in order to confer a benefit to employees (as in Parkes
case) , they are allowed to consider other interests beyond those of shareholders, e.g. employees interests, and would not be in breach of their
duties.
[16.e p.388] Part 5.8A of the Corporations Act now provides for director liability where they have allowed the company to enter into a
transaction designed to defeat worker entitlements.

22

Paul A Davies (Aust) Pty Ltd v Davies

(16.e p.349, 426, 512, 513)
Facts:

The directors of a car dealer company decided to enter into a new venture, due to a market downturn. They purchased
a freehold property in their own names, by using their personal bank loan mixed with interest-free loans borrowed
from the company.

The company was eventually placed in voluntary liquidation, and the liquidator commenced proceedings against the
directors.

Held:

The court held that the directors had breached their fiduciary duty because they used the company funds, without
proper disclosure and approval, for their own private purposes only.

[16.e p.349]
Derived from Paul A Davies (Aust) Pty Ltd v Davies case, when directors obtain funds from the company for their
personal use, without proper disclosure and approval, there will be no defence for them to assert that the funds obtained
were lent to them.

23

Re City Equitable Fire Insurance Co Ltd (Abolished)

(16.e p.448, 465)
Facts:

KHNG cn tm tt ni dung case ny

Held:

KHNG cn tm tt ni dung case ny

[13.4.10] [16.e p.448]

In Re City Equitable Fire Insurance Co Ltd case, it was held that in performing duties, directors need not exhibit a
greater degree of skill that may reasonably be expected from someone of their knowledge and experience. For example, a
director of a life insurance company was not required to have skills of an actuary. It implies that the less knowledge and
experience of a director, the lower the standard of care required of that director.
[13.4.155] [16.e p.465]
According to Re City Equitable Fire Insurance Co Ltd case, non-executive directors duties were regarded as of an
intermittent nature to be performed at periodical board meetings. However, directors were not bound to attend all such
meetings.

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Ring v Sutton
(16.e p.478)
Facts:

KHNG cn tm tt ni dung case ny

Held:

KHNG cn tm tt ni dung case ny

[16.e p.478]
In Ring v Sutton case, the court held that directors breached their duty and disregarded the interests of creditors, when
they caused their company to lend money at less than market rates, even though the company was solvent at the time the
loan was made.

25

Thomas Marshall (Exporters) Ltd v Guinle

(16.e p.431, 512)
Facts:

Guinle was a managing director of an importing company.

Without his companys knowledge, Guinle began to trade on his own account in competition with his company.

Held:

The court granted injunctions preventing Guinle from dealing with the companys customers and suppliers and
disclosing or using the companys confidential information or trade secrets.

26

Walker v Wimborne
(16.e p.38, 39, 346, 387, 478, 479)
Facts:

There was a corporate group but no cross-shareholding.

E lent money to A on security.

At the same time, A lent money to AS with no mortgage or security.

The legal issue arising here is whether this transaction was in the interest of the company A.

Held:

This transaction is not in the interest of A, not even derivative benefits through shareholding, because there is no
shareholding here.

Through shareholding, it is possible to have derivative benefits.

Each company is a separate and independent legal entity, and it is the duty of the directors of A to consult its interests
and its interests alone in deciding whether payment should be made to other companies.

In Walker v Wimborne case, the directors caused the company to make loans to other companies in the group of
associated companies where there was no prospect of repayment, and used the companys funds to pay wages and salaries
of employees of associated companies and to pay the associated companies for work that they had not in fact carried out.
They moved funds between the companies to enable various debts to be paid and used assets of one company as security
for loans obtained by others. The liquidator of one insolvent company in the group took legal action against the directors,

27

and the court held that the directors were liable for prejudicing creditors interests, because the rationale here was that
each company had its own creditors who might look to that company for payment. Consistent with separate legal entity
doctrine, directors of a member company in a corporate group must consider the interests of their company rather than the
interests of the group as a whole.
[16.e p.38] The directors had moved funds between the companies to enable various debts to be paid and used assets of one
company as security for loans obtained by others. The companies went into liquidation.
[16.e p.387] If there is a conflict between the interests of a subsidiary and the group, nominee directors must act in the subsidiarys
best interests and not in the interests of the group as a whole.
[16.e p.478] The directors caused the company to make loans to other companies in the group in circumstances where there was
no prospect of repayment. They used the companys funds to pay wages of the employees of associated companies and to pay the
associated companies for work that they had not in fact carried out.
[16.e p.479] If the lending company is in financial difficulties, its directors prejudice the interests of the lending companys
creditors if the interest rate on the loan is not on commercial terms or if the borrowing company is, or becomes, insolvent and cannot
repay the loan.
[16.e p.479] Directors were held liable on a misfeasance summons for moving funds among companies in the same group, and for
using funds of some of the companies for the payment of wages and salaries of persons who were not bona fide employees of those
companies, but worked elsewhere in the group.

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Whitehouse v Carlton Hotel Pty Ltd

(16.e p.392, 393)
Facts:

Carlton Hotel was owned by the Whitehouse family.

Mr. Whitehouse was its governing director, and all powers of board vested in him alone.

After divorcing his wife, he issued new shares to his sons to ensure that his wife would not have major voting control.

However, after that, when falling out with his sons, he argued that the share issue was invalid due to an improper purpose.
Held:

The court held that creating or destroying the voting power of majority shareholders is not a proper purpose to issue shares.

Thus, the share issue was invalidated.

[16.e p.393]
Derived from Whitehouse v Carlton Hotel Pty Ltd case, where there was more than one purpose for a share issue, the but for test should be
applied to work out whether the directors breached their duty and issued the shares for an improper purpose. An allotment of shares will be
invalidated if the impermissible purpose is causative in the sense that, but for its presence, no allotment would have been made.
[16.e p.526]
When the company is solvent, a breach of directors fiduciary duties can be ratified by an ordinary resolution passed by shareholders.
However, a breach of directors statutory duties under Ch 2D of Corporations Act cannot be ratified by the shareholders, derived from
Angas Law Services Pty Ltd v Carabelas case. For the ratification to be effective, the directors must fully disclose all relevant
circumstances to the shareholders and must have acted in good faith. Additionally, if a breach of directors duties amounts to
oppressive or unfair conduct, it cannot be ratified, due to the purposes of s 232 remedy, derived from Hannes v MJH Pty Ltd case.

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9.B. Dividends
9.B.1. Cases (alphabetical order)
Burland v Earle
(16.e p.270)
Facts:

KHNG cn tm tt ni dung case ny

Held:

KHNG cn tm tt ni dung case ny

[16.e p.270] [10.15]

Derived from Burland v Earle case, unless provided otherwise in the companys constitution, shareholders cannot force
a company to pay dividends even if it has sufficient surplus assets to do so.

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10. Minority Protection and Oppression Remedy

10.1. Cases (alphabetical order)
Foss v Harbottle (Abolished)
(16.e p.642, 643, 644)
Facts:

KHNG cn tm tt ni dung case ny

Held:

KHNG cn tm tt ni dung case ny

[Investment Law Slides Week 2: Members Rights Slide 10]

Historically, the rule in Foss v Harbottle means that members, generally, do not have standing to sue the wrongdoer on
behalf of company; members can not challenge breaches of constitution, if the breach is ratified by an ordinary resolution.
Now, the Foss rule is abolished by s 239(1).
The rule in Foss v Harbottle prevented individual shareholders from taking action against the board of directors for

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breach of their duties, on the basis that the duties were owed not to particular shareholders, but to the company as a whole,
meaning that only the company could take action against the directors.
Source:
http://lexisnexis.com.au/aus/academic/text_updater/documents/harrisch16.pdf
Ctrl + F, search Foss v Harbottle

Re Tivoli Freeholds Ltd

(16.e p.638, 857)
Facts:

Phc tp rc ri, v khng cn tm tt li

Held:

Phc tp rc ri, v khng cn tm tt li

[Investment Law Slides Week 2: Members Rights Slide 12]

Objects clause only affects internal members as a breach of constitution, not outsiders. It could also be breach of directors
duties; oppressive conduct (under s 232, s 233); or winding up for just and equitable grounds (under s 461(1)(k) such as in
Re Tivoli Freeholds Ltd).

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Sanford v Sanford Courier Service Pty Ltd

(16.e p.270, 616, 619)
Facts:

KHNG cn tm tt ni dung case ny

Held:

KHNG cn tm tt ni dung case ny

[16.e p.270] [10.15] ; [16.e p.619] [17.130]

Derived from Sanford v Sanford Courier Service Pty Ltd case, a refusal by a profitable company to pay dividends, in exceptional
circumstances, may amount to oppressive or unfair conduct for purposes of s 232 remedy. In Sanfords case, the majority shareholders
acted oppressively towards the minority shareholder as they excluded him from Sanfords profits, by diverting business away from the
company to another company which was solely controlled by the majority shareholders, and also by paying high directors fees while
refusing to pay dividends. The court held that such refusal to pay dividends was of oppressive conduct, and ordered the majority
shareholders to purchase shares of the minority shareholder at market value.
[16.e p.619]
The majority shareholders may act oppressively or unfairly where the minority are excluded from being directors and a significant
proportion of the profits are paid in the form of high directors fees and low dividends to shareholders.

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