PLEASE DO NOT treat this answer as a model that should be learned by rote.

Rather, it
is simply an illustration of the style that can be used in writing answers. Learning answers by
rote is dangerous as it causes students to ignore a proper analysis of the facts in exam
questions and the resultant irrelevant answer loses marks.

SPECIMAN QUESTION
International Education Ltd has a constitution with only one clause:
The companys activities are restricted to the international sales and
distribution of written textbooks used for educational purposes".
The directors decide to enter into an agreement with KL, a firm that has exclusive distribution
rights in the Asia and Pacific region for a very popular series of audio fiction books in digital
form for MP3 players. International Education Ltd is to be the Australian distributor for the
next 5 years.
After losses are incurred the directors of International Education Ltd decide to terminate the
contract. They inform KL that:
(i) International Education Ltd has no legal capacity to enter into such a contract, and
(ii) that KL should have been aware of this restriction.
REQUIRED:
(a) Advise KL of its rights. Your answer should include consideration of items (i) and (ii) of
the director's correspondence to KL.
(b) Do the directors of International Education Ltd have management powers and if so, were
they bound to use these in a manner that would comply with the objects clause of the
company?

ESSAY ANSWER GUIDE

Part a)
Step 1: The area of law here is the legal position when a company acts beyond the activities
permitted by its constitution.
Step 2: S124 provides that a company has the legal capacity and powers of an individual (an
adult natural person). Since an individual is able to operate any business within the law, a
company is similarly empowered.
S125 provides that it is optional for a company to have an objects clause specifying the
activities of the company. Under the past doctrine of ultra vires, (a company acting beyond its
powers), a company was considered to lack legal capacity and any contract was
unenforceable Re Ashbury Railway case. This doctrine was supported by requirements that all
companies had to have an object clause and the constitution had to be lodged. Outsiders were
considered to have constructive knowledge of the constitution.
Today, the effect of s124 combined with s125(2) is to abolish the doctrine of ultra vires. An
act of a company is not invalid merely because it is contrary to, or beyond, its objects clause.
Public companies are required to lodge their constitutions with ASIC under s136(5) but
s130(1) has abolished the application of constructive notice for documents (other than
charges) lodged with ASIC.
Step 3: The effects of ss 124 and 125, will act to defeat the argument of International
Education Ltd that the company lacked legal capacity when it breached its objects clause by
trading in books that were fictional and in a digital format. Any individual has the legal
capacity to trade in fictional books in an electronic form and therefore so can International
Education Ltd.
International Education Ltd is a public company and therefore its constitution will be lodged
with ASIC under s136(5). However, the abolition of constructive notice under s130(1) will
counter the argument that KL should have known of the objects clause. Indeed, even if KL
had actual knowledge of the objects clause, the right of KL to enforce the contract against
International Education Ltd would not be diminished due to the company having the legal
capacity of an individual.
Step 4: It can be concluded that the contract between KL and International Education Ltd is

enforceable.
Part (b)

Step 1 The area of law here is the powers provided to directors and legal relationship that
exists between directors and their company through the companys constitution.
Step 2: Under s134 a company can operate with a combination of their own constitution and
the replaceable rules. Any replaceable rule that is not displaced by a constitution will continue
to operate. Replaceable rule 198A provides directors with the power to manage the business
affairs of the company.
2

S140(1)(b) provides that a companys constitution and the replaceable rules act as a contract
between directors and the company. The contractual nature of a constitution is also supported
by Hickmans case. Directors are thus bound by both statute and case law to comply with the
company constitution.
Step 3: International Education Ltd has a combination of its own constitution with only an
objects clause in it and the replaceable rules, none of which have been repealed. Therefore
RR s198A operates and empowers the directors to make management decisions such as the
KL contract.
Here, the directors have taken the companys trading outside its objects and thus have failed
to comply with their contractual duty under the companys constitution as required by s140(1)
(b).
Step 4: It can be concluded that the directors have management power but were bound to
exercise this power in compliance with the companys constitution and they have breached
this contractual duty.
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