Happy** to be a safe Harbour in the Mariner?

Today's post considers the decision in ASIC v Mariner Corporation Ltd [2015] FCA 589.

The case is particularly important because it highlights the interaction between directors’ duty and liability where a company breaches a Corporations Act 2001 (Cth).

ASIC brought the case against Mariner and three of its directors alleging the directors had breached their directors’ duties of care and diligence by failing to comply with the takeover provisions under the Corporations Act. ASIC also argued the directors breached their duties regardless of whether the company itself had breached the Corporations Act.

ASIC argued the directors’ primary breach was in relation to their duty of care and diligence, under section 180 of the Corporations Act.

The court held that directors owe their duties to the company. As such, the key issue is whether actions taken by the directors jeopardised the company’s interests.

Here the evidence showed that the directors had considered the risk to the company of their decision and reasonably concluded that the benefit outweighed the risks. This meant there was no breach of section 180 of the Corporations Act.

The case is also important because it was the first time that the so-called ‘business judgment rule’ would have been successfully relied upon if the directors had been found to have breached their directors’ duties.

Next week’s post will explore the key issues in relation to the business judgment rule.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Ned’s Atomic Dustbin song ‘Happy’.

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Two View Legal iPhone and Android apps launched

Based on feedback from advisers, View Legal has recently developed and launched two new iPhone and Android apps.

Each app can be downloaded via the following links –

1. iPhone Directors’ Duties – https://itunes.apple.com/us/app/directors-duties/id902289581?ls=1&mt=8
2. Android Directors' Duties - https://play.google.com/store/apps/details?id=director.duties 
3. iPhone Estate planning – https://itunes.apple.com/us/app/view-legal-estate-planning/id902301642?ls=1&mt=8
4. Android Estate planning – https://play.google.com/store/apps/details?id=view.legal.estate.planning 

Directors’ Duties App

Acting as a director of a company imposes many obligations and duties.

The directors’ duties app is designed to allow the user to help narrow down some of the broad areas that might be relevant in relation to their current or any intended directorships.

Depending on the answers provided, the app generates a free white paper that sets out general information about numerous aspects of the duties directors have.

Estate Planning App

Estate planning is the process of ensuring wealth is dealt with, after death, as intended, while minimising the impact of challenges against the arrangements and costs such as stamp duty, tax and administration expenses.

The estate planning app is designed to allow the user to help narrow down some of the broad areas that might be relevant in relation to implementing, or updating, an estate plan.

Again, depending on the answers provided, the app generates a free white paper that sets out general information about a range of estate planning strategies.

Until next week.

Directors' duties

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

Shareholders have pooled their funds for a common purpose - to conduct an enterprise that they presumably could not afford to conduct on their own. The role of a company director is to guide and grow the business, observing the duties described below.

© 3ddock | Dreamstime.com

Chairman have a particular role to lead the board and to establish an environment in which executive management can successfully execute the strategy set for the company by the board.

As those ultimately responsible for the company's actions and the shareholders' funds invested in the company, directors are subject to a strict set of duties, reflecting the position of trust they hold.

An ability to fulfil these duties while successfully growing the business is the mark of a good company director; a clear understanding of risk versus reward is essential.

In summary, directors have the following duties:

1. act in good faith in the best interests of the company
2. act for a proper purpose
3. act with care and diligence
4. not misuse information they receive in their role, or misuse their position, for their own or someone else's personal gain
5. avoid conflicts of interest, and
6. prevent insolvent trading.

Directors' duties have evolved over time. The above duties are now set out in statutes (primarily the Corporations Act), however, a body of case law expands upon the underlying legal and equitable principles. A company's constitution generally also sets out additional duties and obligations of the directors of the company.

As a general rule, directors owe their duties to the company, not the shareholders or creditors of the company. However, there are provisions in the Corporations Act under which a director can be liable to these stakeholders (e.g. liability for insolvent trading).

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.

Gap between indemnity and insurance policy

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

Given the specific wording of insurance policies and the fact that the deeds of access and indemnity often use general wording, it is clear that there are some forms of liability against which a company will be required to indemnify its directors under the deed of access, insurance and indemnity where the company will not be covered by insurance.

© Dominik Michálek | Dreamstime.com

One example is when a director seeks legal advice in anticipation of a claim, which may or may not be made against the director in the future.  The D&O policy will only respond to cover legal costs once the claim is made.  A gap may also occur because the insurance policy provides cover for a maximum sum whereas the indemnity offered by the company is unlimited.

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.

D&O exclusions

As mentioned in the last post, a D&O policy is normally something that a company should obtain and maintain for each of its directors. 

It is important to note however that D&O policies usually exclude cover for acts or omissions of directors, before the policy period commenced, that the director reasonably knew were likely to give rise to a claim and which were not notified to the insurer. 

Fraud or dishonesty, or any wilful or deliberate breach of the law by the insured, will also be excluded.

© Flynt | Dreamstime.com

Numerous other standard exclusions are normally set out under a D&O policy.

Although these exclusions are typically 'standard', each company's D&O policy is a bespoke contract and should be checked carefully to understand the coverage limitations.

Until next week.

Deeds of access, insurance and indemnity

Following on from last weeks' post, this week's post is again extracted (with thanks) from the Chairman's Red Book.

Under deeds of access, insurance and indemnity, the company usually agrees to:

1.    indemnify the director to the extent permitted by law;

2.    maintain, and pay the premium on a D&O policy covering the director;

3.    maintain a copy of all board papers; and

4.    give the director access to the board papers and other documents of the company.

Access to board papers and company documents is essential for a director to discharge their obligations.

Most companies and directors put in place such agreements on a uniform basis for each director. 

Where deeds are required for other executives (non directors) they may require some modification.  For example, these officers will typically not be entitled to access the board papers.

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.

What is a ratchet & the Chairman’s Red Book

The Chairman's Red Book provides a quick reference guide for directors of any company, particularly chairmen of public companies (whether listed or unlisted).

At this stage, the book is only available on request, for anyone interested in receiving a copy, please let me know.  The Chairman’s Red Blog is also another supporting resource for the book.

Over the coming weeks, with special thanks to Brett Heading, and the other editors of the publication, there will be posts from the book on some of the core principles featured.

This week's post is shorter than the others (given the background outlined above) and simply answers the question - what is a ratchet.

A ratchet is a mechanism that varies the equity share that management receives on exit, depending on the achievement of certain objectives.

Typically, ratchets are based either on the multiple of money invested that is received on exit after repayment of debt, or the internal rate of return achieved by the private equity fund.

Ratchets can strengthen the alignment of the interests of management and the investor. However, the taxation implications can be complicated and need careful consideration in structuring any agreement.

Until next week.

Why would a professional partnership incorporate?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Why would a professional partnership incorporate?’. If you would like a link to the video please let me know.

As usual, a transcript of the presentation for those that cannot (or choose not) to listen to the presentation is below –

The number of answers to this question are probably only limited to the number of professional practices there are out there.  There are a range of reasons. 

Tax is one and we keep coming back to that, but that can sometimes be in the eye of the beholder from that perspective. 

We're seeing, certainly from a risk management perspective and asset protection and the credit crunch and everything else that’s going on and the changes to the bankruptcy rules in the recent past mean that everyone is much more aware that when things go wrong, it's very attractive to have your liability limited.  

Obviously, that’s probably the biggest advantage of an incorporated model. 

There's also I guess the sense from people talking about retaining key staff and the skills shortage that many professional organisations are facing these days that it tends to make sharing of equity a lot easier if you've got a true corporate model. 

That can sometimes be as simple from a perception viewpoint that a lot of times staff or key employees are much more aligned and find it much easier to understand a company setup as opposed to some sort of fancy trust arrangement or a service trust arrangement for that matter. 

Certainly, the transaction costs side of things, in terms of the hard costs, particularly stamp duty, in most states now, the concept of having to pay stamp duty on the transfer of listed shares is basically a thing of the past.  So that can be very attractive to people. 

The last main reason and perhaps this is touching on the perception side of it again, I think the corporate model from a governance perspective, it tends to be a lot easier for people to understand.  We've done a lot of work in this area and it is interesting that by becoming a director, and by having a board and by having shareholders and all of these sorts of more formal things, even though the deck chairs haven't really changed in the organisation, there seems to be an air of governance around the place that just wasn't there while they remained as a partnership.

Until next week.

What are some of the steps taken in relation to regulating control of testamentary trusts

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are some of the steps taken in relation to regulating control of testamentary trusts?’ at the following link - http://youtu.be/A104L8JfGGw




As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The reality I think for many people in this area at the moment that estate planning as a whole, and particularly the use of more bespoke forms of testamentary trusts, is the ‘new black’. 

What that has meant I think for a lot of advisers in this area, particularly for those with legally trained advisers is that many of the concepts that you see in wider corporate law or corporations law are now actually being filtered back into traditional estate planning.

What we're finding, particularly where people are wanting to use trusts that are going to last at least 2 generations, possibly even 3 or 4, is that the regulatory regime, if you like, sitting around the control of those structures is becoming far more sophisticated.

Probably the biggest thing we're seeing in that area is the use of specifically set up trustee companies. Not in terms of the government setup structure, but in terms of the actual client setting up a corporate structure and being very particular about the way the constitution of that company is crafted, the way shareholders can be nominated, the way directors are appointed and the way voting takes place within that structure all overseeing the way in which the actual trust is going to be run moving forward.

Until next week.

Court drafted wills

Last week I had an example of a client situation which in some respects was similar to the post a few weeks ago where a sole director died without a will.

The situation that came up last week involved a client who was the sole director of a number of companies and had lost capacity.

While she had an attorney appointed via the Guardianship and Administrative Appeals Tribunal (there are separate entities in each state regulating how someone can be appointed as an attorney where the incapacitated individual has not otherwise made a valid appointment), the director here also did not have a will.

In many situations, there is now the possibility to apply to a court before someone’s death and have the court approve a will.

The process is a relatively intense one, primarily because the court system holds the making of a will as something that ultimately should only ever be made by the individual in control of the relevant assets.

This said, when compared to dying intestate, the process is often one that we strongly recommend be considered.

Until next week.

Keeping it simple with company set ups

Following the last post, I had a question in relation to how the secretary position of the sole director company was resolved.

Interestingly due to relatively recent changes to the Corporations Act, there is now no longer a requirement to have a secretary for a proprietary limited company.

For those interested to explore the provisions in this regard further, the particular section of the Corporations Act is Section 204A(1).

Until next week.

Sole director companies – An estate planning tip

During the week, due to a rather unfortunate set of circumstances, I was reminded of a very important provision under the Corporations Act.

The situation broadly was as follows:

1. The sole director of a number of companies suddenly passed away.

2. A number of third parties (including a financier) questioned representatives of the deceased director’s estate about the authority for the company to continue to act and in particular, requested copies of the deceased’s will.

3. The deceased director in fact died without a will.

While there will be a number of issues that arise in relation to the director dying intestate (including the way in which the shares in the various companies are to be distributed amongst the family members), the immediate issue concerning who had authority to act as director of each company was resolved by a particular section of the Corporations Act.

In particular there is a section that allows the legal personal representative of a sole director company to take steps to appoint a new director.

While a fairly significant amount of additional paperwork has been required because of the absence of the will, the various concerns of the financier have at least been managed for the time being.

Given the number of public holidays over the next 10 days or so, unless a particularly time sensitive issue comes up, there will not be a post for a couple of weeks and today’s post is made ‘early’ (normally it would be posted next Monday).

How many directors does it take to have a company ?

Last week, I further explored the issues that came out of a relatively common situation of a loan or unpaid present entitlement owed to a company, where that company was a trading entity.

As mentioned last week, one asset protection strategy that often makes sense on a number of levels is ensuring that the only directors of a trading company are those people who, commercially, absolutely must be a director.

Often, we find situations where, for example, a husband and wife are both directors of a company when only one spouse in fact needs to be.

As directors carry personal liability, this is unnecessarily risky.

While this issue can normally be very easily solved by simply resigning the relevant director and giving notification to the company and the ASIC - care must be taken.

In particular, all companies, until the late 1990s, had to have at least two directors (and, other than in very limited circumstances, all public companies must still have three directors).

Therefore, even though the Corporations Law has been updated for about 13 or 14 years now, there are many company constitutions (or as they were formally known ‘memorandum and articles’) that still require two directors.

If a director resigns in breach of the company constitution, there can be a series of Corporation Law issues that need to be taken into account. These issues can all be avoided by simply ensuring the company’s constitution is updated before the resignation takes place.

Until next week.

Matthew Burgess

In times of peace - prepare for war

Two weeks ago, I explained the importance of reviewing all loan accounts and unpaid present entitlements in the context of asset protection issues.

As flagged, that particular client situation was also problematic for a further two reasons. Those reasons were:

1. Both the husband and wife were directors of the trading company, even though the wife had no active involvement in the business.
2. Both the husband and wife were shareholders in the trading company.

Aside from the fact that the trading company had a large asset on its balance sheet (being the loan or UPE), the wife was also personally liable (automatically) due to her directorship. This issue could have been avoided by simply resigning her as a director. There is a further related practical tip in this regard that all advisers should be aware of and I will explore this further within the next couple of weeks.

The second issue was that the husband (who had to be a director because of the level of involvement he had in the day-to-day operations of the business) personally owned shares in the trading company.

As a director, the husband carried personal liability and this means that his personal assets (including his shares in the trading company) were exposed.

Unlike the loan account issue, the strategies available in relation to the share ownership were ones that could only really be implemented subject to the bankruptcy clawback rules which (at a minimum) would delay any protection in relation to the shares until four years after divestment.

As usual, until next week.

Matthew Burgess