Question

Explain how a company may change its constitution. In your answer discuss the relevant provisions of the
Corporations Act 2001 (Cth) AND any relevant common law cases.

The procedure for amending a company constitution is set out in section 136 of the Corporations Act
2001(cth). A special resolution by shareholders has to be passed before the constitution is amended or
repealed. The Act specifies that at least 75% of the shareholders have to agree to the changes in the company
constitution. A company can apply rules against members however members cannot enforce provisions in the
constitution that would appear to confer rights on them in some capacity other than as a member.

Cases:
Gambotto - the special resolution to amend the constitution was not "fair" in all circumstances.
Forbes v NSW Trotting Club Ltd [1977] 2 NSWLR 515, shows that only members can enforce the company’s
rules.

Question
Ross was a promoter of a company called Edmanuals Pty Ltd. Six months before the company was registered
Ross signed a contract on behalf of Edmanuals Pty Ltd for $10,000.00 per month for 6 months for the hire of a
2008 CLS500 Mercedes Benz motor vehicle from Ross’s Cars Pty Ltd. Ross is the sole director and sole
shareholder of Ross’s Cars Pty Ltd. Edmanuals Pty Ltd does not want to honour the contract. Advise Edmanuals
Pty Ltd.

Ross in his capacity as promoter is liable to himself as Ross Cars. It may be that he should have has informed
RossG of a conflict of interest. As promoter he has duty of disclosure of any interest. Under s131 (2)he is liable
to pay damages to himself as RossG Cars unless he gets the court under 131(3)to order RossG (a) pay all or
part of the damages. It seems Ross, as promoter could avoid liability to himself as Rosss cars if he had given
himself a release under 132(1).

According to law, prior to registration, no legal identity of the organization gets formed and company dos not
have authority to sign any contract. In this case, Ross, the promoter, signed contract in behalf of the company
to pay $10,000.00 per month for 6 months to RossG Pty Ltd for hiring their car service; Ross is the sole director
and shareholder in this company. According to common law, contracts signed by promoters prior to company
registration are not binding after company registration an agent (promoter) cannot act for non-existed
principle. For example, case of Blacks vs. Smallwood (1966) which shows without Registration Company cannot
act in an agency relationship. In case of Kelner vs. Baxter (1866) in this case plaintiff stated that promoter of
the company signed contract on behalf of proposed company to purchase wine, but later on company failed
and plaintiff asked for his money from promoters, as the word proposed was used in the contract, it shows that
promoter was personally liable in this case and not company. Similarly, in above case also RossG Pty Ltd is not
liable to execute the contract signed by Ross.

The two issues are promoters duties and pre-registration contracts. In this scenario, Ross, as a promoter of
RossG Pty Ltd, owed fiduciary duties to RossG Pty Ltd. The pre-registration contract is an application of ss 131
and 132 to the facts.

Note that the separate legal entity's doctrine separates Ross from RossG Pty Ltd.

Question
Giving examples from both the Partnership Act 1892 (NSW) and the Corporations Act 2001 (Cth), explain what
is meant at law by apparent or ostensible authority.

Apparent or ostensible authority relates for the authority one has within the partnership / company to act on
behalf of or for the company or partner. Under the Partnership act and the Corporations act there is a
fiduciary duty or an obligation of loyalty between related parties when acting on another's behalf being a
person or a company. In the Partnership Act s5(1) it states every partner has the authority to act on behalf of

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 other partners. Under the Corporations Act, the Agent for the company has authority to act on behalf of the
Company. In the Corporations Act s 437b the agent acting as an administrator for the company is discussed, the
Agent in this case is acting on behalf of the company and has the authority to act. Where a company or a
partnership has "held out" or represented that a person has authority to act on their behalf. Lynch v Stiff -
Lynch being a salaried partner of the law firm was believed to be a partner by a client as his name appeared on
letter heads for the firm. He was represented by the firm as a partner but he was a senior employee.

In business, agents deal with several third parties on behalf of the company, it is not possible for third party to
know actual authority of the agent; therefore they depend on the authority appeared in front of them, it is also
known as apparent authority. However, there is risk involved in this type of authority as it might be possible
that agent does not have any authority at all or he is exceeding the limit of his authority[ CITATION Lat12 \l
1033 ]. Therefore, apparent authority can be defined as the authority which appeared to be possessed by the
agent but not actually given to him. Therefore, it is a legal relationship created between principal and the
contractor through representation.

For reference case of Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985), in this case partner was
acting in two limbs, first was acting under actual authority and second under apparent authority; according to
this this outsider must clearly form actual or apparent authority in partnership in order to make in enforceable
by law [ CITATION Gri05 \l 1033 ]. Another example can be Young v Lamb (2001) in this case it was within actual
authority of a partner to renew the lease of retail premises in which business use to operate; however other
partner stated that they have not given authority to the partner to renew the lease.

Question
Maree is an experienced accountant and audits the financial report of IOD Ltd. During the audit she suspects
that a contravention of the Corporations Act 2001 (Cth) has occurred. What contractual duties does Maree owe
IOD Ltd under the common law? What is Maree required to do if she suspects a contravention of the
Corporations Act?

In the given case Maree (accountant and auditor) suspects contravention of corporation act 2001, which must
be informed to the management of IOD Ltd and in case management does not take appropriate action, it must
be taken to ASIC[ CITATION Tom02 \l 1033 ]. In this case Maree is supposed to report the contravention in the
auditor report and bring it in front of directors of the company. According to common law duties, it is Maree
responsibility to warn managers and directors of the company regarding suspected fraud[ CITATION She15 \l
1033 ]. For example, Kingston case which states that it is an auditor job to act as watch dog for the company;
auditor is responsible for ensuring that proper duty, care and caution was ensured [ CITATION Ple10 \l 1033 ].
Section 303-307 of the corporation act 2001, states statutory duties and power of auditor of a company,
according to which it is mandatory to inform ASIC with 28 days regarding any contravention of corporation act
within organization.

Question
Why is Gambotto v WCP (1995) 13 ACLC 342 an important decision?

It provides protection to minority shareholders within closely held private companies. Which means majority
shareholders of that company cannot expropriate the share that they hold at less than proposed value on the
market.

Gambotto v WCP (1995) was an important decision in the corporate law history of Australia legal system; in this
case high court of Australia decided that alteration in the constitution is allowed for the welfare of the
company, in case of conflict of interest among different group of shareholders or expropriation of shares
[ CITATION Cas06 \l 1033 ]. This case radically impacted the power of minority shareholders in the company.
However, according to court decision, this act was only applicable to prevent any harm to the company.

Question

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 “The law recognises a corporation as a distinct legal entity, having a separate existence and a corporate
personality of its own, quite apart from the members who comprise it.” Discuss this statement with reference
to the main legal consequences both at common law and under the Corporations Act 2001 (Cth).

According to section 1.5.1 of the corporation act 2001, a company is a separate legal entity with its own rights
and powers, its entity is separate from its operators (including managers, shareholders, employees, agents etc.)
it has its own property, rights, assets and obligations until it deregister itself. Under corporate law also,
company is defined as separate legal person, in terms of rights, duties, properties and liabilities. However, this
corporate veil is disregarding in scenarios in which internal management of the company make acts that they
are personally liable. For example Salomon Vs. Salomon co ltd. (1897) is a classical case that helped in
understanding thin line of difference between company and its shareholders [ CITATION Tom02 \l 1033 ].

Question
What is voluntary administration?
Describe the link between voluntary administration and the insolvent trading provisions in the Corporations
Act 2001(Cth).

Voluntary administration is an insolvency procedure where the directors of a financially troubled company or a
secured creditor with a charge over most of the company's assets appoint an external administrator called a
'voluntary administrator'.

Link between voluntary administration and the insolvent trading provisions of the Corporations Act 2001
imposes liability on directors of a company where they allow the company to incur debts when the company is
either insolvent or the debt will render the company insolvent. Section 588G Corporations Act outlines the
director’s duty to prevent insolvent trading by the company and should be revisited and understood.

Question
Giving an example, distinguish between the capacity of a company and the capacity of its agents. Your answer
should highlight why the distinction is important.

Capacity of a company – ultra vires doctrine

A company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company
also has all the powers of a body corporate, including the power to:
- Issue and cancel shares
- issue debentures
- grant a security interest in uncalled capital
- do anything that it is authorised to do by any other law

Capacity of its agents -

A company acts through its agents. If agents do not have the power they profess, they may be personally liable.
On the other hand, third parties could have difficulty enforcing contracts against the company if a person who
purported to act as agent of the company did not have legal power to do so.

Question
In relation to a public company issuing debentures through a prospectus explain the actual or potential roles of
the trustee for debenture holders, the prospectus, the debenture trust deed, the register of security interests
and a receiver.

Actual or potential roles of the trustee for debenture holders = the trustee acts on behalf of the debenture
holder, roles include, enforcing the company’s duty to pay, any of the terms of the trust deed and facilitating
the efficient operation of the trust.

The prospectus = the primary function of prospectus disclosure is to address the imbalance of information
between issuers of securities and potential investors. Given the important role of disclosure in the market, the
Bill makes a number of changes to improve the current disclosure requirements.

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 Debenture trust deed = The trust deed must provide for the duties of a trustee to enforce the borrower’s duty
to repay; any charge or security for repayment; and the rights of enforcement under the terms of the
debentures or deed; see s.283AB The trust deed contains clauses that provide rights of debenture holders
against the company; the company’s obligations, including limitations on future borrowing and the nature of
any security that is attached to the loan.

Register of security interests a receiver = registered on the PPSA, a received is appointed to look after interest
of a bank or secured creditor.

Question
“Partners are in a fiduciary relationship with each other”.
Explain and illustrate this concept.
Also explain when the fiduciary relationship may begin and when it ends.

This relationship means that they owe each other, and the business, certain basic duties.
Fiduciary duty: honesty, good faith, fairness, loyalty, partner may not earn a secret profit. Duty to act for the
common benefit of all partners in transactions relating to the business, and the duty to refrain from taking
advantage of one another by any misrepresentation, concealment, threat, or adverse pressure relating to the
partnership and its business.
Fiduciary relationships begin when both parties go into agreement.
And ends if and when a partner dies, retires, court order, end of a period or becomes bankrupt

Question
The Corporations Act 2001(Cth) provides for the rights and remedies of members of a company.
Identify and discuss four important statutory remedies available to a minority shareholder under the
Corporations Act.

Oppression - connotes the exercise of authority or power in a burdensome or unjust manner. See case Popovic
& Ors v Tanasijevic & Ors
Statutory derivative action – brought, usually by a shareholder, on behalf of a corporation to redress a wrong
done to. the corporation see case Denis Cassegrain v Gerard Cassegrain
Injunction – order of the court generally direct a person to refrain from doing an act or from omitting to do an
act
Winding up by the court - petition

Question
Al Moy is a large creditor of IPL Pty who hears rumours about the company’s possible insolvency. IPL Pty owes
Al $15,000. What should Al do?

A1 Moy would serve a statutory demand on IPL or should it also be added - the ILAC response all the way to
orders on the grounds of failed to comply to statutory demand (as a hypothetical if the first did not work)

Question
In relation to a company meeting briefly explain the rights of a member to demand a poll, appoint a proxy,
dismiss a director, and place an item on the agenda of a meeting.

Demand a poll: The importance of a poll in company meetings is that a vote by a poll is determined on the
voting rights of shares held (these rights are usually specified in the Constitution), and may result in a different
decision from the other type of voting used in company meetings, namely a show of hands. In a show of hands

Appoint a proxy: Proxies: Section 249X is a mandatory rule for public companies and a replaceable rule for
proprietary companies. Thus there is an entitlement for a member of a public company to appoint a proxy to
attend and vote for him/her. The proxy can be a body corporate: s 249X(1A).

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 Dismiss a director: Section 203D allows the removal of a director of a public company before his/her term of
office expires. The effect of the above procedure is that a director of a public company may only be removed by
resolution of the company in general meeting. The board of directors of a public company has no power,
irrespective of any provision in the company’s Constitution, to remove a director from office: s 203E. Removal
of directors in a proprietary company will be in accordance with the company’s Constitution: see replaceable
rule s 203C.

Place an item on the agenda: Any member of the public or any Board member may request that a matter
within the jurisdiction of the Board be placed on the agenda of a regular meeting. The request must be in
writing and be submitted to the Superintendent or designee with supporting documents and information, if
any, at least seven (7) days before the scheduled meeting date. Items submitted less than a week before the
scheduled meeting date may be postponed to a later meeting in order to allow sufficient time for consideration
and research of the issue. The Board President and Superintendent shall decide whether a request is within the
subject matter jurisdiction of the Board. Items not within the subject matter jurisdiction of the Board may not
be placed on the agenda. In addition, the Board President and Superintendent shall determine if the item is
merely a request for information or whether the issue is covered by an existing policy or administrative
regulation before placing the item on the agenda. The Board President and Superintendent shall decide
whether an agenda item is appropriate for discussion in open or closed session, and whether the item should
be an action item, informational item or consent item.

Question

Bob wants to assist a yet to be formed company to take advantage of lucrative contracts which need to be
signed before the company is incorporated?
Citing the relevant sections in the Corporations Act discuss whether or not Bob could be held liable if he signs a
pre-registration contract.

Sect 131 of the Corp Act 2001

“The person is liable to pay damages to each other party to the pre-registration contract if the company is not
registered, or the company is registered but does not ratify the contract or enter into a substitute for it:”

Question
“In Salomon v Salomon & Co. Ltd [1897] AC22, Mr Salomon was very lucky.
Today, on the same facts, he would be personally liable for the debts of the company, and the security
(debenture) given to him by the company would be invalid as a priority over the unsecured creditors”. Do you
agree? Comments.

It has been discussed since that case that many considered the case has calamitous decision. In the decades
since Salomon's case, various exceptional circumstances have been delineated, both by legislatures and the
judiciary, in England and elsewhere (including Ireland) when courts can legitimately disregard a company's
separate legal personality, such as where crime or fraud has been committed.So yes, I agree that if the
Salomon v Salomon & Co was held today, Mr Salomon wouldn’t be so lucky.

Question
The Board of Directors of Lackcash ( a proprietary co) are considering the following options:
(a) To raise capital of $6 million by an issue of shares to its shareholders; or
(b) To utilise any method of obtaining the $6 million without contravening Ch 6D of the Corporations Act.
Advise the Board of Lacklash Pty Ltd of the corporations law involved.

The raise of the 6 million should also be exercised in good faith and in the best interest of the company as a
whole. As Sec113(3) of the corp act 2001 states, directors of a PTD company are only able to issue shares to
individual persons known to the company and not the public. So Lackcash are able to follow through on point
A.

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 Once listed, a company can periodically issue further shares via a rights issue, raising yet more capital for
expansion without running up debt. Being in a position to raise capital from the stock markets, rather than
privately from individual investors, is a major incentive for many companies to issue shares on an exchange.
Renounceable rights are rights offered by a company to existing stockholders to purchase further stock, usually
at a discount. These rights have a value and can be traded. If rights are to be issued, the company has to set the
price of the new shares, determine how many it will sell, and assess how the current share value will be
affected as well as the effect on new and existing stockholders. Nonrenounceable rights are not transferable
and cannot be bought or sold; these rights must be taken up or they will lapse

Question
In Gambotto v WCP Ltd (1995) 182 CLR432. the High Court laid down certain tests which apply to assessing the
validity of alterations to a company’s constitution in relation to minority shareholders interests. Briefly outline
the facts of Gambotto and provide a brief explanation of those tests.

The power to alter the Constitution could allow despotic rule of a company by those who are able to command
the requisite majority to have the special resolution passed. As we shall see this necessitates certain
protections such as those found in s 140(2) and the decision in Gambotto v WCP (1995) 13 ACLC 342.
Section 140(2) prevents the company increasing the liability of a member by modifying the Constitution in
certain ways after the person became a member, unless the member agrees. Prohibitions include:
requiring the member to acquire more shares;
pay additional money to the company; and
increasing restrictions on transferability of shares except in certain cases, such as conversion of a
company from public to proprietary.

The statutory power to amend the Constitution must be exercised for a proper purpose and not oppressively.

- Fairness test

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