Week 6
In 2009, Hot Mineral Resources NL (HMR) received $6m from ANZ Bank as payment for 60,000 redeemable cumulative preference shares in HMR. HMR has five duly appointed directors. HMR was in some financial difficulty prior to ANZ’s $6 million payment. HMR has a constitution which adopts the Replaceable Rules. A dividend of 6.5% was to be paid annually and there was to be a guaranteed redemption of the capital at the end of four years. $3 million was invested in good “blue chip” stocks on the ASX. The balance of $3 million was distributed in 2 transactions to Copper Holdings Pty Ltd. Ms Wright was a 45% shareholder of Copper Holdings (the remaining shareholders held less than 1% of the shares each in Copper Holdings). Ms Wright was also a director of HMR. The two transactions were:
- Payment by HMR of future management fees to Copper Holdings ($1.5million). Copper Holdings had not completed any management duties at the time of payment; and
- An unsecured interest only loan by HMR to Copper Holdings at a rate of 3% per annum with the principal payable in five years ($1.5m).
The five directors unanimously passed a resolution approving both transactions. Ms Wright disclosed her material personal interest in the transactions by notice to the other directors as required by section 191 CA. Ms Wright argues that the purpose of all the transactions was to ensure that there would be sufficient funds to pay ANZ in 2013. ANZ agrees that the $3 million payment for ASX shares fulfilled that purpose but the other two transactions to Copper Holdings were to benefit Ms Wright as a shareholder of Copper Holdings Pty Ltd.
Following a complaint by the ANZ Bank, ASIC wants to take action against Wright for breach of section 181.
Advise ASIC as to whether Wright has breached section 181 CA. You DO NOT need to discuss remedies. For the purpose of this question, discuss both sections 181(1)(a) and (b) in your answer
- Law: Section 181(1)(a): (refer to flowchart)
- An officer (s9)
- Exercise their power / discharge their duty
- Good faith
- Objective test: A reasonable person in officer position and company circumstances would consider that the action not in corporation’s best interests (ASIC v Adler)
- In the best interests of the corporation
- Corporation = shareholders as a whole when company solvent (Darvall v North Sydney Brick & Tile Co)
Application:
Wright was an officer of HMR because Wright is HMR’s director to make or participate in making decisions that affect HMR the whole or a substantial part of the business of the corporation (e.g. Rodney Alder in Adler v ASIC)
Wright must exercise her power in good faith in the best interests of the HMR.
Ms Wright required the HMR to pay 6.5% dividend and repay capital when the company in financial difficulties. Cooper Holdings interests are really in favour of because Wright was 45% shareholder of Cooper Holdings, and HMR invested $3m in 2 transactions to Cooper Holdings. Payment by HMR of future management fees to Cooper Holdings was not a company liability, because Cooper Holdings had not completed any management duties at the time of payment. And unsecured interest loan only by HMR of five years compared to the capital repayment period of four years is not in the best interests of the corporation.
- Section 181(1)(b): (refer to flowchart)
- Step 1: Power
- Step 2: Purpose of power
- Step 3: If multiple purposes, identify the dominant purpose using the “but for” test (Whitehouse v Carlton Hotel Pty Ltd)
- Step 4: Proper or improper based on case law or if none available, objective test (e.g. ASIC v Adler in this case)
Application:
Wright exercise the power is in good faith.
There are multiple purposes for the exercise of power that Wright make all transactions to ensure sufficient funds to pay ANZ in 2013 and ANZ against that Copper Holdings transactions to benefit Wright as shareholder.
The dominant purpose is that the due date for payment on the $1.5m loan versus the due date for repayment of the capital and the advance payment of management fees and affect HMR does not have sufficient funds to repay the capital.
The dominant purpose is improper because Wright undertaking transaction with directors on terms very favourable to Cooper Holdings.
(Improper purpose: Providing personal benefits to directors or particular members; Undertaking transactions with directors or particular members on terms very favourable to them; Forgiving debts owed to the company by direcots and Transferring company assets to others in an attempt to avoid recovery by creditors or receivers.)
Conclusion: Wright has breached s181 which enable ASIC to claim remedies.