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Question:

Discuss about the Commercial Law for Corporation Act.

 

Answer:

As per section 198 A of the corporation Act 2001, directors of the company has number of powers and this section define those powers. Clause 2 of this section states that director has power to exercise all their powers related to company, but there is an exception which clarifies directors cannot exercise those powers which need to be exercised in general meeting of the company as per Act or company’s constitution. This can be understand with example which states that company directors have power to issue shares and debentures, and borrow money for the company[1].

Section 124 of the Act defines the company’s legal capacity and power, and this section stated legal capacity of the company exists both inside and outside of jurisdiction, and power of company also includes power of body corporate, and under this power company can issue shares and cancel those shares[2].

Section 254A states power of company to issue bonus shares, this section stated that company has power to issue shares under section 124 and this power also includes the power to issue bonus shares. However, bonus shares are defined as those shares in which consideration is not paid by shareholders for getting the shares to the issuing company, and company does not increase its share capital while issuing bonus shares[3].

In this case, Waldmart Ltd directors pass resolution in the board meeting to issue bonus shares to those people who are considered as existing shareholders of the company, and power to issue bonus shares is provided to the directors by the constitution of the company.

Section 198 of the Act states that director has power to exercise all their powers related to company, and Section 254 A of the Act states that company has power to issue shares under section 124 and this power also includes the power to issue bonus shares, and directors are allowed to issue bonus shares from the Constitution of the company. All these facts state that directors of Waldmart Ltd can issue bonus shares because this power is imposed by various sections of the act as well as constitution of the company.

As per section 180 of the Act directors are bound by various duties and this section define these duties, and clause 1 of this section defines the most important duty of director, as director are obliged to exercise their power related to company with due care and diligence that would be exercised by any reasonable person in similar situation it that person is act as the director or officer of the company, occupied the office of the director or such person has same responsibilities as the director. Whereas, clause 2 of this section defines the judgment rule of business, and according to this clause it is the obligation of director that they meet the requirements stated under subsection 1 for the purpose of making the business judgment. However, it is the duty of directors that they make the judgments related to business in good faith, and ensure that their judgment must be in the best interest of the organization[4][5].

Therefore, shareholders cannot deny or overrule the decision made by directors in direct way, but different ways are provided by law, through which they can overrule the decisions of directors such as, those shareholders who holds at least 5% stake in the company compel the directors of the company to call general meeting. In such general meeting shareholders of the company can determine the resolution passed by directors for the purpose of overrule the decision made by directors. Some legal rights are also available to the shareholders if directors of the company do not act in the company’s interest[6].

In this situation, Better Super Ltd and the other shareholder of the company can force or compel the directors of the company to call general meeting for reconsidering their decisions.

Provisions related to dividend payment in company is defined by section 254U of the Corporation Act 2001, and as per this section payment of dividend can be determined by directors of the company, and they also have power to fix the rate or amount on which dividend is payable, time for dividend payment, and also the method of payment. Method for paying the dividend includes various methods such as cash payment, issue of shares, granting options to existing shareholders, and the transfer of interest. This section further states that any kind of interest on dividend is not payable[7].

According to section 254T of the Act define the situations in which directors can pay dividend to shareholders, and subsection 1 of this section states that company can only pay dividend when liabilities of the company are less than the assets of the company just before the declaration of dividend, and it is necessary that such excess amount must be sufficient for making the payments to shareholders.

It must be noted that directors are not allowed to pay dividend unless they show that payment made by them is fair and reasonable for both shareholders as well as for company, and such payment does not affect the materially affect the ability of the company to make payment to its creditors. For example, in case company become insolvent after paying dividend to its existing shareholders, then this payment materially affect the capacity of company to make payment to its creditors. However, Section 588G also states that it is duty of director to prevent insolvent trading in context of declaration and payment of dividend.

Subsection 2 of this section stated that for the purpose of this section all assets and liabilities of the company are calculated as per the applicable accounting standards. However, assets and liabilities are still calculated as per accounting standards even though those standards are not applicable to some or all the related companies[8].

 

As stated above, Section 588G of the Act that it is duty of director to prevent insolvent trading in context of declaration and payment of dividend, and this section further stated that applicability of this section is possible only in case when person holds the position of director in the company at that time when debt is incurred, and when company become insolvent due to that debt. However, at that time reasonable grounds must be there to believe that company is insolvent or it would become insolvent. Clause A of subsection 1 of this section for the purpose of incurring debt, company must pay dividend or company’s constitution states the payment of dividend[9].

In the present case, Waldmart Ltd directors make proposal in the meeting to declare dividend and they also make proposal to increase the rate of dividend up to 25%. Directors increased the rate of dividend because existing shareholders of the company rejects the remuneration report of director’s in last general meeting, and that time first strike is received by the company.

According to the opinion of directors of the company, they are confident that their dividend proposal would please the shareholders of the company so that they did not make any issue related to first strike. However, letter was issued by directors to the shareholders of the company, and letter contains the justification related to remuneration report on the part of directors which contains reasons related to excess remuneration and importance of approving the reports.

Jim Smith holds the position of manager in Better Super Ltd has 4% stake in the equity of waldmart Ltd. As per the opinion of Jim and other shareholders, decision of directors for issuing bonus shares is not the right decision, and they also think that increasing rate of dividend is also not right during this unstable financial position of the company. In this case, directors do not act in the best interest of the company by declaring the dividend, and this is considered as breach of duty. Therefore, shareholders of the company can apply for order from Court under section 232 of the Corporation Act 2001, and this remedy is availbale to shareholders under section 234[10] of the Corporation Act 2001[11].

According to section 232 of the Act, Court can make order under section 233 if any affairs of the company, any act or omission on company’s behalf, and any resolution or proposed resolution passed by directors of the company contravene the member interest in the company[12].

In the corporation Act 2001, new amendment was introduced on 1st July 2011, and this amendment named as “two strikes”. However, the main aim of this amendment is to increase the accountability of directors related to their remunerations. As per this amendment directors of the company clearly face the re-election on remuneration reports if shareholders of the company are not agreed with the amount paid to directors of the company[13].

According to this amendment first strike occurred when remuneration report of the company received no vote of 25% at AGM of the company from the existing shareholders. However, remuneration report of the company contains the salary and bonus details related to each director of the company. Obligation is also imposed on directors in this amendment to provide explanation to the shareholders concern stated in previous remuneration report, and these explanations are provided by directors in subsequent remuneration report under section 249L (2), the Remuneration Amendment Act.

In this amendment, second strike occurred when subsequent remuneration report of the company received no vote of 25% at AGM of the company from the existing shareholders. If second strike is received by the company then all shareholders of the company voted on the matter of re-election. It must be noted that this matter of re-election is determined in the same annual general meeting in which second strike occurred. After this spill meeting take place within 90 days of AGM, if spill resolution receives 50% or more votes.

This can be understand in other words also, which means that in case spill resolution received equal to or more than 50% votes, then company must held extra ordinary general meeting of the shareholders of the company within 90 days of passing the spill resolution. This meeting is also named as spill meeting, and in this meeting shareholders of the company has power to remove all the directors except CEO, and if shareholders exercise this power then deeming provision is applicable there which ensures that at least three directors must be there. In case spill meeting is not hold by the company in 90 days of passing the spill resolution then each person who holds the director position in the company is liable for the offence committed under strict liability stated under Section 250W, the Remuneration Amendment Act.

This new amendment aims binding vote on remuneration report and policy of the company, and this amendment gives power to shareholders to spill the directors of the company under second strike. The main purpose of spill meeting is to decide whether board of the company is retained or not[14].

This new amendment is more useful as compared to old provision, and the difference between the two strike rule and the previous law CLERP 9 is because in this new amendment provision is stated that directors replied to the shareholders concern even after the first strike in case of listed Australian companies. Therefore, this rule is described as wreaking havoc by the Mr. John Colvin, CEO of the Australian Institute of Company Directors (AICD)[15].

 

Bibliography

Statute

Corporation Act 2001.

corporations amendment (improving accountability on director and executive remuneration) bill 2011. 

Article

Lin Elicia, ‘Shareholder oppression explained’, < https://www.findlaw.com.au/articles/4614/shareholder-oppression-explained.aspx>. 

Georgia Wilkins, ‘What is the 'two-strikes' rule’, (2012) < https://www.smh.com.au/business/agm-season/what-is-the-twostrikes-rule-20121008-278us.html>. 

Website

Legal service commission, ‘General Duties of Directors - Corporations Act 2001 (Ctth)’, < https://www.lawhandbook.sa.gov.au/ch05s01s03s02.php>. 

Law Donut, ‘Shareholder and boardroom disputes FAQs’,< https://www.lawdonut.co.uk/business/business-ownership-and-management/shareholder-and-boardroom-disputes/shareholder-and-boardroom-disputes-faqs#SBD10>. 

Reza Monema & Chew Ng, ‘Australia’s ‘two-strikes’ rule and the pay-performance link: Are shareholders judicious’, < https://www98.griffith.edu.au/dspace/bitstream/handle/10072/54958/90206_1.pdf?sequence=1>.

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