AYB230 CORPORATIONS

LAW
SEMESTER 2, 2018

LECTURE 2: REGISTRATION,
PRE-REGISTRATION &
COMPANY CONSTITUTION
 Lecture 2 overview

– Disruptive example
– Classes of companies LO 2.2
– Registering companies LO 2.3
– Company rules and constitution LO 3.1-3.3
– Object clause and ultra vires LO 3.4
– Constitution as contract LO 3.5
– Changing the constitution LO 3.6
– Company promoters LO 4.1-4.3
– Pre-registration contracts LO 4.4
– Key terms
Disruptive example-3
companies can’t be the same as a natural
person?
• Can a company be guilty of murder?
• WARNING – DISTURBING CONTENT
• http://www.dailymail.co.uk/news/arti
cle-3195417/Tuna-companys-ex-safety
-manager-guilty-worker-oven-death.ht
ml
Module 2

Companies
and incorporation

Classes of companies LO 2.2

Company registration LO 2.3
 LO 2.2 Classes of companies

• Broad classification of companies: Figure 2.1

 Member liability

There are 4 main types of company, s112

– Company limited by shares
– Company limited by guarantee
– Unlimited company
– No liability company
• See s 9 for definitions
 Company limited by shares

• Company limited by shares – the liability of members

is limited to any unpaid amount on the shares they
hold.
– Most common type of company in Australia.
– May be public or proprietary.
 Company limited by guarantee

• Company limited by guarantee – the liability of

members is limited to an amount they have
undertaken to contribute in the event of a winding up.
– Often used by clubs and charities, where the
members’ liability is limited to their membership
fee.
 Unlimited company

• Unlimited company – the members’ liability for the

debts of the company is not limited.
– May be a proprietary or public company.
– Often used by professional practices who are
prohibited from using a limited liability structure
(e.g. lawyers and accountants).
– While not offering limited liability, unlimited
companies do provide access to the other
advantages of the company structure.
 No liability company

• No liability company – members are not obliged to pay

any unpaid amount owing on shares. Instead they will
forfeit the shares.
– Must have share capital.
– Must have stated that its objectives are mining.
– Must not have any contractual rights to recover
money owed on partly paid shares.
 Registering companies

• See ASIC website for the steps, based on ASIC IS 61

• Companies created through registration by ASIC s117
• ASIC Form 201
• http://www.asic.gov.au/regulatory-resources/forms/fo
rms-folder/201-application-for-registration-as-an-austr
alian-company/
Module 3

Companies
constitution
A company’s rules & constitution
LO 3.1-3.3
The objects clause & UV LO 3.4
Who is bound by the company
constitution? LO 3.5
Changing a company’s rules LO 3.6
 LO 3.1 – 3.3 Rules and procedures

• Most companies are required to have a set of rules and

procedures.
– All companies should have a set of rules and procedures.
• Collectively called the constitution
– Where is it found?
– What does it say?
– Who does it apply to?
– What is its effect
• The rules agreed by the members to govern the internal
workings of the company
 Company constitution

Form of Company
Constitution
s134

Pre 1.7.98 Post 1.7.98

memorandum of
articles of Replaceable rules
association constitution
association internal rules
powers & type optional
internal rules s135
of liability

rely on rely on model existing existing do not apply to

draft own rules
Corp Act rules companies may companies may single
eg
to confer powers in former repeal theirs adopt RR member/director
modify Table A
s124 Corporations Law s136 instead companies

15
 Companies established
prior to July 1998

• Companies established prior to July 1998 were formed

with:
– Memorandum of Association:
• the objectives of the company
• member details
• share capital details
• any limitations on the powers of the company.
 Companies established
prior to July 1998

• Companies established prior to July 1998 were formed

with:
– Articles of Association:
• the rules that govern the company’s internal
affairs
• relationship between shareholders and directors
• rights and obligations of members.
 Companies established
after July 1998

• Companies established after July 1998 are required to

have a set of rules.
• The rules may be:
– the replaceable rules provisions of the Corporations
Act (s141)
– a company constitution of tailor-made rules
– a combination of the two.
– s134
 Company rules

• Company rules:
 The replaceable rules

• Most types of company can choose to use the

replaceable rules as a set of default rules to govern the
internal matters of the company in relation to:
– officers and employees
– inspection of financial records by members
– directors’ meetings
– members’ meetings
– shares.
• S141
 The replaceable rules

• Provisions of the Corporations Act that apply as

replaceable rules:
 The replaceable rules

• Provisions of the Corporations Act that apply as

replaceable rules:
 The replaceable rules

• Provisions of the Corporations Act that apply as

replaceable rules:
 The replaceable rules

• Some of the replaceable rules have exceptions for or

special application to:
– proprietary companies
– single director/shareholder companies
– public companies.
• It is often more appropriate for a company to write a
company constitution - a set of rules tailored to the
company’s size, goals and activities.
 The company constitution

• Companies often choose to create a constitution

rather than use the replaceable rules.
• Some companies are required to have a constitution,
e.g.:
– Unlimited companies
– ASX-listed companies.
• are required to include rules pertaining to
appointment of a proxy
• are forbidden to include pre-emption clauses.
Class activity 26

Look at the Qantas constitution

• How difficult is it to locate?

• Would you read it before deciding to
invest?
 The company constitution

• A company constitution can better match the

particular nature and circumstances of the company
and cover a wider range of matters.
• A company adopts its company constitution when:
– it is registered,
– when a members’ meeting passes a special
resolution to adopt it, or
– when a court orders it.
 LO 3.4 Objects clause

• The objects clause of a constitution:

– sets out the objectives for which the company exists
– helps give potential shareholders confidence that the
company will act as expected
– helps give potential creditors confidence that the
company will act as expected.
• Historically, companies had narrow objects clauses because
they were formed for:
– a single purpose or project
– to undertake a narrow range of activities.
 Objects clause & ultra vires

• Object clause - optional

– What a company can do?
– What is its purpose or reason for existence?
• Corporate capacity
– Section 124 – Companies have the capacity to do most things
that a natural person can do, and some additional things,
including issuing shares
• What is the effect of internal limitations on powers, such as in
the constitution?
• Section 125 – constitution may limit power or objects, but acts
outside those limitations not invalid as against third parties
 The doctrine of ultra vires

• ultra vires means to act beyond authority

– a transaction that is outside a company’s objects
clause is ultra vires
– historically, an ultra vires transaction or contract
was considered to be void and unenforceable.
• The constructive notice rule:
– a person dealing with the company was considered
to be aware of the objects of that company.
 Objects clause

• Ashbury Railway Carriage & Iron Co v Riche (1875)

L.R. 7 H.L. 635:
 Objects clause

• Recognising the broad scope of commercial activities

today, the Corporations Act changed the operation of
ultra vires and the constructive notice rule:
– a company has no inherent limits on its powers
– an action is not invalid merely because it is outside
the company’s objects
– the doctrine of constructive notice is abolished.
 Class activity
33

• Copies of constitution
• Watch the UK series on Good board meetings – first 3.5
mins
• http://www.youtube.com/watch?v=nfP5N9Yc72A
• Articles = constitution
• If you had to find a copy the articles/constitution of a
company,
• How would you go about it?
 LO 3.5 Who is bound
by the company’s rules?

• S140: The replaceable rules/company constitution

create three statutory contracts:
1. A contract between the company and each
member.
2. A contract between the company and each
director and company secretary.
3. A contract between a member and each other
member.
 Who is bound
by the company’s rules?

• Statutory contracts created by s 140(1) of the

Corporations Act:
 Who is bound
by the company’s rules?

1. The contract between the company and each member:

– The company can sue the member to comply with the
company constitution.
– The member can sue the company to comply with the
company constitution.
– The contract applies only to the member’s rights as a
member, not to other rights.
– Hickman V Kent or Romney Marsh Sheep
Breeders 1915
– Eley v Positive Government Security Life
Assurance Co (1875)
 Who is bound
by the company’s rules?

2. The contract between the company and each director

and company secretary:
– The director or company secretary can sue the
company to comply with the company constitution.
– The contract applies only to the rules relating to the
directors/company secretary.
– Carrier Australia v Hunt (1915)
 Who is bound
by the company’s rules?

3. The contract between a member and each other

member:
– A member can sue to enforce another member to
comply with the company constitution.
– Usually, an enforceable contract between members
will arise when there is a pre-emption clause and a
group of shareholders wants to take over others.
– Re Carratti Holdings (1975)
Class activity
39

• “Shareholders agreements”
– Referred to a lot in practice
– Is NOT the constitution
– So what is it, why do you need it and what
does it do?
• http://www.mondaq.com/australia/x/551
928/Shareholders/Do+I+need+a+Sharehol
ders+Agreement+Lessons+from+a+burger
+bun+fight

• https://www.youtube.com/watch?v=JKZ4
T8NmkM0
 LO 3.6 Changing the rules

• A company using the replaceable rules can adopt a

constitution to exclude the replaceable rules.
• A company with a constitution can repeal its
constitution to adopt the replaceable rules.
• A company can make changes to its constitution by
passing a special resolution. - 75% of votes
• Changes to a company constitution must be lodged
with ASIC within 14 days.
• s136
 Changing the rules

• Limits on changing the constitution:

• s 140(2) prohibition on imposing further liability on
members
• s 232 protection of minority members from oppression by
the majority
– Fairness
– Gambotto v WCP
• https://prezi.com/oufqxtikahtl/amending-the-corporate-c
onstitution/#
• Changes that affect the rights of a particular class of shares
generally requires the approval of the affected shareholders
 Gambotto rules

• If a change to a company constitution involves taking

minority shares, the change must be:
– for a proper purpose:
• to the benefit of the company, or
• to prevent harm to the company
– fair in all circumstances:
• the value exchanged for the shares must be fair
• the change must not be oppressive to the
shareholder.
Module 4

Promoters and
pre-registration
contracts

Who is a promoter? LO 4.1

Duties and liabilities of promoters LO 4.2
Remedies LO 4.3
Pre-registration contractsLO 4.4
 LO 4.1 Promoters

• Promoters are the individuals responsible for the formation of a

company.
• strict rules over the powers and duties of promoters, including
the obligation to make appropriate disclosures.
• Active promoters:
– Anyone actively involved in the formation of a company
– Except: professionals acting under instruction in their
professional capacity (e.g. solicitors, accountants).
• Passive promoters:
– Those not actively involved in the formation of a company,
but who stand to gain some advantage from its formation.
 Promoters: Case law

– Twycross v Grant (1877)

– Emma Silver Mining Co V Lewis & Son (1879)
– Aequitas Ltd v Sparad No 100 Ltd (2001)
– Tracy v Mandalay Pty Ltd (1953)
– Gluckstein v Barnes [1900] AC 240
 Passive promoters

• Tracy v Mandalay Pty Ltd (1953) 88 CLR 215:

 Promoters

• Identifying promoters:
 Duties and liabilities
of promoters

• Established in common law that promoters owe

fiduciary duties to the company:
– act in good faith
– in the best interests of the company
– avoid conflicts of interests.
• Conflict of interest most often arises when a promoter
wants to sell an asset to the company they are
forming.
 Duties and liabilities
of promoters

• A promoter’s potential conflict of interest:

 Avoiding liability

• To avoid liability, promoters can:

– Make full and frank disclosure:
• inform the company of their interest
• inform the company of the profit they stand to
make
• obtain the company’s consent (from an
independent board of directors or shareholders’
resolution).
 Duties and liabilities
of promoters

• Gluckstein v Barnes [1900] AC 240:

 Remedies

• If a promoter has breached their duties, a variety of

remedies may be available.
– recovery of secret profit
– rescission of contract
– damages
– constructive trust.
 Remedies

• Steps in analysing a promoter’s breach of duties:

 LO 4.4 Pre-registration contracts

• Pre-registration contract:
– entered into by the promoter with the intention
that the company to be incorporated will be liable
for the contract
– under common law, pre-registration contracts were
not binding
 Pre-registration contracts

• Section 131(1) – ratification

• A pre-registration contract is binding if:
– a person enters into a contract on behalf of a
company before it is registered
– the company is later registered
– the company ratifies the contract within an agreed
or reasonable period of time.
 Pre-registration contracts

• Section 131(2) — promoter liability

• The promoter is liable to pay damages to the other
party if:
– the company is never formed, or
– the company fails to ratify the contract.
• The damages equal the amount the company would
have been liable for had it failed to perform under the
contract.
 Pre-registration contracts

• Section 131(3) — recovering against the company

• If the company is formed, but fails to ratify a pre-
registration contract:
– a proceeding can be brought against the promoter
– the court has broad powers
– Court can order the company to pay for the
damages for which the promoter is liable
 Pre-registration contracts

• Section 131(4) — promoter pays damages for which

the company is liable
• If the company ratifies the contract, but fails to
perform
– the court can order the promoter to pay some or all
of the damages for which the company is liable.
 Pre-registration contracts

• Analysing pre-registration contract issues: