Chapter 27 - Company Law:

27.15

For a proprietary company to be classified as a small proprietary company in any

financial year it must ensure that it does not satisfy at least two of the following
criteria or it will be classified as a large proprietary company (s45A(3)):
- a consolidated gross operating revenue at the end of the financial year of less than
$25 millions;
- consolidated gross assets at the end of the financial year of less than $12.5 millions
- fewer than 50 employees at the end of the financial year (s45A(2))

27.16

Since 1998 and the passage of the Company Law Review Act 1998, a company has
not been required to have a memorandum and articles of association. Companies in
existence prior to 1998 continue to have a memorandum and articles as their
constitution unless and until they repeal them (s1415). if a company does repeal its
constitution and does not replace it with a new one, the “replaceable rules” will apply
(s 135(1)).

Companies today may choose to be governed by a constitution, or by the “replaceable

rules” or a combination of both (s135). the “replaceable rules” govern the internal
administration and management of the company and are replaceable in that a
provision stated to apply to a company as a replaceable rule can be modified or
displaced by the company’s constitution (s135(2)). A table of provisions that apply as
replaceable rules can be found in s 141 of the Corporation Act 2001 (Cth).

27.17

According to s140(1) a company’s constitution (if any) and any applicable

replaceable rules have effect as a contract between:
- the company and its members - this means that the company can take action against
its members to force them to comply with provisions in the constitution or replaceable
rules where they are unwilling to do so voluntarily (s140(1)(a));
- the company and each director and secretary - only those provisions in a company’s
constitution and replaceable rules that apply to such officers have effect as a contract
under s140(1)(b)). see for example ss198A, 201G, 201H, 202A dealing with
appointment, powers and remuneration of directions and s204F dealing with a
company secretary; and
- the members themselves - s140(1)(c)); this provision is only likely to be important
where provisions in a company constitution contain pre-exemption clauses.

27.18

A company can raise capital in two ways: by share capital and loan capital. In the case
of the former, a shareholder is a member of the company while in the case of the
latter, a lender is an external creditor. The rules relating to the raising and
maintenance of share capital do not apply to loan capital while a company is not
restricted in issuing loans at a discount and it may redeem them in accordance with
the terms of the loan.

Company can borrow funds in much the same way as an individual. Thus a company
can borrow funds from bank or other financial institution with or without security and
one method employed by a company is through the issue of debentures. This is a
document which acknowledges the indebtedness of the company, ie as a debt due to a
creditor.

The relationship between the company and a debenture-holder is governed by the law
of contract and if the debenture is secured, by property law as well as the CLERP Act
1999 (Cth), Chapter 2L(ss 260FA-260P).

“Debenture” is defined broadly in the Corporations Act as a chose in action which

includes an undertaking by a company to repay as a debt money deposited with or lent
to it (s9).

Debentures are usually secured by a mortgage or security over the borrowing

company’s property and may take the form of:
- a circulating security interest under the Personal Property Securities Act has now
replaced a floating charge - a party can register an interest on a variety of assets such
as inventory which may change from time to time.
- A non-circulating security interest has replaced fixed charges - this attaches to
specific property owned by the borrower which may or may not exist at the time
security is given and which may or may not be owned by the company at the time the
security is created.

27.19

A conflict of interest arises where the director’s duties to the company and their
personal interests are in conflict. A conflict would arise if the director had other
business interests and the company to which the duty is enclosed purchases goods or
services from the organisation in which the director has interest.

The director owes a duty to the company, not to the shareholders as individuals,
therefore if the director breaches that duty to the company, it is the company that
should bring the action to defend its own interests.

27.20

The appointment of a receiver may be by secured creditors or by the court (s1323).

The appointment of a privately appointed receiver does not affect the legal personality
of the company, nor does it displace the board and their primary role is to restore the
company financial prosperity. However, it does affect the ability of the directors to
exercise their powers of management and the ability of the company to continue its
business. For example, the appointment of a receiver will usually crystallise a floating
charge, which revokes the powers of the company to deal with its secured assets in the
normal course of business. There is also a sharing of powers where the directors retain
residual powers where the receiver only has control over part of the company’s assets.
A court-appointed receiver does not fill the same position as a privately appointed
receiver. Their role is not so much to restore profitability but to preserve the assets of
the company and its potential for earning profits in the future. Court-appointed
receivers are under more stringent duties than privately appointed receivers.

27.21

Darvall will argue that the joint venture agreement should be set aside on two
grounds:
- the directors, in approving the scheme, had exercised their powers for an improper
purpose to defeat his claim; and
- the joint venture agreement constituted the giving of indirect financial assistance to
the managing director.

While the managing director has breached his duty to the company by failing to
disclose his financial arrangement with Chase, it did not follow that the other directors
had breached their duty to the company. As long as they believe that what they did
was in the bona fide belief that it was for the benefit of the company, the fact that the
decision was made in ignorance of all the facts or was induced by a misrepresentation
did not affect the validity of their decision (see Darvall v North Sydney Brick & Tile
Co Ltd (1989) 16 NSWLR 269 but note that Kirby J held that the directors had not
approved the joint venture bona fide for the best interests of the company as they
suspected a secret arrangement with Chase and did not make further inquires that
would enable them to argue they had acted properly).

27.22

Samuel’s interests as both director and shareholder of Australian Goldfields conflicted

with his duty to act in the best interests of Cape Town Holdings. He breached his
fiduciary duty to Cape Town Holdings even though he absented himself from the
board’s deliberations.

Harvey also had conflicting interests even though he was holding Australian
Goldfield shares as a trustee. He was under a duty to Cape Town Holdings to make
the best bargain he could for it in relation to the transaction with Australian
Goldfields. This conflicted with his duty to make the best bargain he could for the
beneficiaries of the trust (see Transvaal Lands Co v New Belgium (Transvaal) Land
& Development Co (1914) 2 Ch 488).

Chapter 31 - Bankruptcy

31.15

A debtor commits an act of bankruptcy when they are unable to pay their debts out of
their own money as they become due. There is no minimum amount. Section 40(1) of
the Bankruptcy Act 1966 (Cth) lists the various acts of bankruptcy which generally
make it clear that the debtor is unable to pay his or her debts. They include:
- if the debtor makes a conveyance or assignment of property, creates a charge on
their property, makes a payment or incurs an obligations that would, if they became a
bankrupt, be void as against the trustee;
-

Chapter 33 - Business ethics:

33.4 Explain the difference, if any, between a corporate ethics code and an
industry code of conduct under the Competition and Consumer Act 2010 (Cth):
(Application of CCA to unethical practice)
A corporate ethics code is essentially a voluntary code of behaviour, setting minimum
standards of behaviour for employees and management. They may be aspirational
setting out ideals of best practice and generally unenforceable, or prescriptive and
much more specific with breaches being subject to punishment.

The Competition and Consumer Act 2010 (Cth) gives legal recognition to industry
codes of conduct which have been designed and approved by industry. The code
regulates the conduct of industry participants towards consumers in the industry or
other industry participants. Some codes are mandatory and bind all the participants, eg
the Franchising Code of Conduct, while others are voluntary, setting best practice
standards and binding only those who wish to be bound.

33.5 Explain what is meant by “socially responsible investing”: (benefits for

business in practicing ethical practices)
Socially responsible investing involves investors having regard to political, social,
economic and environmental considerations when deciding what investments they
will make. It is yet to make a significant impact in Australia although the
Commonwealth Government has included under the disclosure requirements of the
Corporations Act 2001 (Cth) a Product Disclosure Statement for superannuation,
managed investment and managed investment life insurance funds.

33.6
Was the execution of the mortgage “unjust”? Sandra might have had limited business
experience but the fact that she had sought advice from her son, an accountant, and a
solicitor friend, who had both advised her against going though with the loan would
probably mean that the courts would be reluctant to intervene (see West v AGC
(Advances) Ltd (1986) where a similar case was brought unsuccessfully under the
Contract Review Act 1980 although the dissenting judgment of Kirby J found a
number of aspects of the loan unjust

Chapter 34 - employment Law:

34.16 is there a uniform employment law throughout Australia?

Employment law is generally uniform throughout Australia since the main legislation
applying to employment is under the Commonwealth Fair Work Act 2009. Other
legislation applies nationally such as Work Health and Safety Act 2011 (Cth) and the
Sex Discrimination Act 1984 (Cth), though there is some different law applying to
State employees in certain States. Generally, however, common law principles are
much the same throughout Australia.

34.17 what is the role of the Fair Work Commission?

The Fair Work Commission (FWC) is the peak national workplace relations tribunal,
with powers and duties outlined in the Fair Work Act (FWA) to set wages, resolve
disputes and ensure the FWA is complied with. The FWC cooperates with the Fair
Work Ombudsman who takes an active role in resolving disputes as they occur and
ensuring that there are no breaches of the Fair Work Act if possible. These executive
bodies are independent from the government and proactively will inspect workplaces
for compliance with the Fair Work Act.

34.18 why is it important to distinguish an employee from someone who is

supplying services as a contractor?
The distinction between an employee and contractor is crucial because employers are
responsible for the actions of someone who is considered an employee. An employees
works directly under the direction of an employer, the employee takes instruction
from the employer and is required to carry out their work specifically to those
instructions. The employer in turn is responsible for the actions of their employees,
including any injury or damage caused by, or to, the employee; an employee has
certain employment rights against the employer through both legislation and common
law. A contractor, on the other hand, works for themselves and does not take
instruction from another party except under the terms of the contract they enter.
Whether a party is an employee or contractor is a question of fact and determined by a
series of tests found in the case of Hollis v Vabu Pty Ltd (2001) CLR 21, whereby the
degree of control exercised over the person engaged indicated that they were an
employee, with little discretion (such as a contractor would have). A contractor must
make their own provisions for sick leave, provision of tools and supervision, whereas
an employee can rely on an employer to arrange this.

34.19 what kind of duties are expected of employees? Do these duties have to be
specifically stated in a contract of employment to be enforceable?
Duties owed by employees are determined by any existing contract of employment,
by industrial agreements for a particular industry and from implied duties under the
common law. An employer may impose certain duties within a contract, eg a very
specific requirement as to non-disclosure of information, or requirements in the
manner in which an employee is to perform their work. Most duties however are
implied by common sense and from industry practices, and can be determined by
what a reasonable “bystander” would expect. Any reasonable person would expect an
employee to arrive on time for work, to work diligently, to always ensure they act in
the interests of employer when carrying out work, eg to ensure that tools and
equipment are kept safe and used properly. Such common sense standards would be
expected of any employee and do not need to be spelt out in a written contract.

34.20
The issue is whether the relationship between James and Jeff is one of employer and
employee, or rather one of engaging a contractor (Jeff) who is then liable for his own
actions.

Jeff would obviously argue that he is an employee, and that therefore James is hos
employer and responsible for not only his (Jeff’s) injuries which may require
compensation, but also liable to the baker for any damage done while work was
carried out under the responsibility of James.

Jeff would point to the criteria of Hollis v Vabu whereby he would claim to be an
employee on the grounds that he did not work for himself, he did not own any tools,
did not seek out work and was totally under the control of James in any tasks
allocated to him. Futher, Jeff would argue that he was injured while carrying out work
for James, and that crawling under a floor was an entirely reasonable expectation of
an employee carrying oit their work. Jeff might ask for compensation for lost income.

James might attempt to argue that Jeff is no longer an employee and that given the
independence of Jeff, who now does other work and is not reliant on James for his
income, then Jeff is an independent contractor. If Jeff is an independent contractor
then he is liable for his own injuries, and further may be liable to the baker for any
damage caused by his work.

34.21

The issue in this situation is whether any threatened industrial action by employees is
permissible as protected, or whether it is unprotected industrial action which may
leave the union open to a claim for compensation by an employee for any losses.

If the union is seeking to take industrial action then they should have a vote first and
give requisite notices to the employer, while the Fair Work Commission will attempt
to resolve the situation between employers and employees. The Fair Work Act does
permit industrial action under “permitted matters”, one of which could be the
dangerous situation affecting the workers on the factor floor. Much also depends on
what is contained in the enterprise agreement and whether there is reference to
working conditions and potential dangers to workers.

Ultimately if there is an unsafe work situation and workers are at risk then there is no
compulsion to work in such an environment and workers can refuse to work, and this
is not considered to be industrial action. The union might ask for appropriate
representatives to inspect the factory, and refusal might be seen as a contravention of
the Fair Work Act.

The union is best to refer the matter to the Fair Work Ombudsman to undertake an
inspection and further to try and resolve the situation. If the Union does undertake
inappropriate and unlawful industrial action, then it runs the risk of staff being
dismissed and possible payment of compensation. However, any unreasonable refusal
to act on reports of unsafe working conditions could also weigh on the employer, and
further could be a breach of Health and Safety legislation.