Business Law: Alteration of Constitution, Contracts before Registration, and Directors' Duties

This article discusses the alteration of constitution, contracts before registration, and directors' duties under Business Law. It covers the procedure for alteration, limitations on alteration, contracts before registration, directors' duties to individual shareholders, and more.

Running head: BUSINESS LAW
Business law
Name of the Student
Name of the University
Author Note

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Answer 1A
Alteration of constitution
The provisions related to the way in which the constitution of a company can be altered
are provided through the Corporation Act 2001 (Cth). The constitution is the main document
which sets out the relationship of the members with the company, third parties and between
members. There is a specific procedure to be followed for altering the constitution which has
been provided under s 136 of the Act1.
Procedure for alteration
It has been provided through s 136(2) of the Act that the constitution of a company may
be repealed or modified through passing a special resolution2. It has been further stated by s
136(3) of the CA that it may be provided through the constitution that there would be no effect of
a special resolution unless a requirement which has been specified in the constitution in relation
to its modification or repealing has been met3. Under s 136(4) it has been further clarified that
unless a contradiction is provided by the constitution the organization would be able to repeal
and modify the requirement mentioned in s 136(3) if the requirement has been itself satisfied4.
Limitations on alteration
However, in the case of Gambotto v WCP Limited5, the courts had limited the right of the
majority shareholders to alter the constitution in relation to expropriation of shares. It was stated
by the court in this case that the alteration of the constitution to expropriate shares of the
1 Corporation Act 2001 (Cth) s 136
2 Corporation Act 2001 (Cth) s 136(2)
3 Corporation Act 2001 (Cth) s 136(3)
4 Corporation Act 2001 (Cth) s 136(4)
5 [1995] HCA 12

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minority would be valid only if it is done for a proper purpose and it would not be oppressive to
minority shareholders. In this case it was further clarified by the court that expropriation of share
is allowed when the minority share holding act in a way which is detrimental for the company or
the minority is competing with the organization. The alteration would not be allowed if the
directors are doing it to take commercial advantage for themselves.
The validity of alteration done by Sammy and Huw
The first requirement for alteration of a constitution under s 136 is that it requires a
special resolution. Special resolution means voting by 75% of the shareholders of the company.
In this case Sammy and Huw hold 90% of the shares in the company and thus have the capacity
of passing a special resolution to alter the constitution under s 136(2). In addition there is no
requirement which is provided through the facts which could prevent the alteration of
constitution under s 136(3) and 136(4). Thus the alteration is valid under the CA. However the
application of Gambotto v WCP Limited is also required to analyze the validity of the alteration
done by Sammy and Huw. It has been provided through the facts that the alteration is being done
in relation to the expropriation of shares of those who have less than 11% holding and in this
case it is Amaya.
The court stated in this case that expropriation would only be valid if it is done for a
proper purpose and it would not be oppressive to minority shareholders. In this case it can be
stated that it is oppressive to Amaya who is a minority share holder. However, the court further
clarified that fact that expropriation of share is allowed when the minority share holding act in a
way which is detrimental for the company or the minority is competing with the organization. In
the present situation it is provided that Amaya is also acting as the accountant for the competitors

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of the company. She is also trying to get Gracey to take the podcasts to the other company she is
working for. Thus, it is clear that she is competing with the company and the alteration of the
constitution would therefore be valid.
Answer 1B
Contracts before registration
The provisions related to contract before registration are dealt under the rules of s 131 of
the Corporation Act 2001 (Cth). It has been stated by s 131(1) that if a person has formed or
intends to form a contract for the benefit of or behalf of the company prior to its registration, the
company is bound to the terms of such contract and is entitled to the benefits if a company or a
company which is identifiable reasonably with it ratifies the contract. The ratification has to be
within a time which the parties to the contract have agreed or a reasonable time if there is no
agreement6.
Further, under s 131(2) it has been clarified by the CA that a person would be liable to
compensate to every other party to the pre-registered contract in case the company does not
ratify the contract within the specified or reasonable time, or if it does not get registered. The
compensation amount would be the amount which the company would have to pay in case the
contract was ratified by the company and was not performed7.
In case there is a proceeding which has been brought in relation to s 131(2), the court has
the power if it is identified that the although the company has been registered it is not ratifying
the contract or has gone into a substitution if it, to do anything which it considers to be apt in the
situation under s 131(3). This may include paying all or part of damages which the person is
6 Corporation Act 2001 (Cth) s 131(1)
7 Corporation Act 2001 (Cth) s 131(2)

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liable to pay, return the property received under the contract and pay compensation to the party
to the contract8.
In addition under the provisions of s 131(4) in case a company has ratified a
preregistration contract and is not able to perform it as a whole or in part, the court may order the
person to pay the damages which the company is required to pay9.
Contract with Gracey
The facts of the case stipulate that Huw has formed a contract with Gracey under which
Gracey is to be paid with $4000 every month for a one month period in relation to provisions of
weekly podcasts. This has been done on 20th April 2018 and was on behalf of Gosh.
Unfortunately the name Gosh was not available and the company had been registered in the
name of Oh My Pty Ltd. This means that Oh My Pty Ltd is a company which is reasonably
identifiable with Gosh. The contract has been formed before the registration of the company and
thus it is a pre registration contract under s 131. If a person has formed or intends to form a
contract for the benefit of or behalf of the company prior to its registration, the company is
bound to the terms of such contract and is entitled to the benefits if a company or a company
which is identifiable reasonably with it ratifies the contract as per s 131(1). However Oh My Pty
Ltd have not ratified the contract.
This means that under the provisions of s 131(2) Huw may be asked to compensate
Gracey as there is no ratification which has been done on the situation and Gracey decides to
make a claim. Further the application of s 131(3) would signify that if Gracey makes a claim the
court may ask Oh My Pty Ltd to pay all or part of damages which Huw is liable to pay to Gracey
8 Corporation Act 2001 (Cth) s 131(3)
9 Corporation Act 2001 (Cth) s 134(4)

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or return the property received under the contract and pay compensation to Gracey. In addition,
under s 131(4) the court may also ask Huw to compensate Gracey if it is identified that Oh My
Pty Ltd have ratified the contract with Gracey and have breached the contract.
Answer 2A
Directors’ duties
There have been various duties imposed on directors by the operation of common law
and Corporation Act 2001 (Cth) these duties can be divided in statutory duties and general
duties. Under common law there is a duty that the directors act in good faith and for a proper
purpose ensuring the best interest of the company. These duties have been incorporated into the
CA through the rules of s 181.
Section 181 of the CA
The duty is in relation to good faith of directors and other officers. Under s 181(1) a
director or officer of a company has to exercise powers and discharge duties for a proper purpose
and in good faith towards the organization’s best interest10. The breach of this section results in
civil penalty provisions which are provided through s 1317E of the Act11.
The provisions of breach of section 181 had been discussed in the case of Kinsela v
Russell Kinsela Pty Ltd (in liq)12. In this case the court stated that the best interest of the
company generally does not include taking into consideration the interest of the shareholders.
However, when the company is approaching insolvency or is insolvent the interest of the
creditors have to be considered. In addition it was stated in the case of Whitehouse v Carlton
10 Corporation Act 2001 (Cth) s 181(1)
11 Corporation Act 2001 (Cth) s 1317E
12 (1986) 4 NSWLR 722

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Hotel Pty Ltd13 that the powers which are used by the directors must only be for an intended
purpose. In case the action is not considered to be of a proper purpose by a reasonable person
then also the court can identify the breach of this section as held in the case of Bell Group Ltd (in
liq) v Westpac Banking Corp (No 9)14.
Breach by directors of Drink It Up Pty Ltd
In the present situation it is provided that the directors of Drink It Up Pty Ltd have
decided to form a new company as they are facing losses with respect to the their fruit juice
business and making profit in relation to the spring water business. All assets in relation to the
spring water as been passed to the new company named H2O Pty Ltd. This has been done to
avoid financial difficulties which Drinks was subjected to in relation to paying its creditors in the
fruit business. Under s 181 the directors have to act for a proper purpose and in good faith
towards the organization’s best interest. In this situation a proper purpose may be identified
objectively by the court as per the case of Bell Group Ltd (in liq) v Westpac Banking Corp. Any
reasonable person would not feel that the act is for an intended purpose, as asked by the case of
Whitehouse v Carlton Hotel Pty Ltd. This is a clear attempt to defraud the creditors on the part of
the directors. This action would also not be considered to be in the best interest of the company
under the provisions of the case of Kinsela v Russell Kinsela Pty Ltd. The company Drinks have
been subsequently wound up and it can be clearly stated that the actions which had been entered
upon by its directors to divide the company was for an improper purpose and also not done in
good faith for the best interest of Drinks. Thus s181 have been breached by the directors of the
company. They would have to pay fine under s 1317E extending up to $200000 or may be
banned from managing the company under s 206C
13 (1987) 162 CLR 285
14 (2008) 225 FLR

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Answer 2B
Directors’ duties to individual shareholders
In the case of Percival v Wright15 it had been stated by the court that the directors of the
company only have general duties imposed on them in relation to the company as a whole and
not to individual shareholders. In this case the directors purchased shares from the shareholders
who wanted to sell the shares at a lower rate before selling the company which would make the
price of the shares high. The court held that there was no breach of duty on the part of the
director as they do not owe duties to individual shareholders.
However, this decision had not been followed by the court in the case of Coleman v
Myers16. In this case it has been stated by the court that the directors have a fiduciary obligation
to the shareholders under which they are required to disclose all material facts in relation to an
offer which can change the mind of the person to get into the transaction. This situation had been
further discussed by the courts in the case of Peskin v Anderson17. In these case it was stated by
the courts that the there is an exception to the general rule provided in the case of Percival v
Wright. This would take place when the situation is such that a greater duty is owed to the
individual shareholder by the directors in situation where it is visible that the shareholder is
putting reliance on the directors for guidance or when he shareholder is a vulnerable person.
Further, it is provided under s 588G that the directors should not indulge into trading
when they know that the company is insolvent. In case they have indulged into a conduct which
15 [1902] 2 Ch 401
16 [1977] 2 NZLR 225
17 [2001] BCLC 372

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can be considered as insolvent trading they can also be personally liable for the losses incurred
by the investor.
Breach of directors duties by Kristofer
Whether Kristofer have breached directors duties or not would depend on the fact that
whether he owed any duty individually to Dhruv. The application of the case of Percival v
Wright in this situation would clarify the fact that the directors of the company only have general
duties imposed on them in relation to the company as a whole and not to individual shareholders.
Here also the facts of the case where similar to the facts in hand. In this case the directors
purchased shares from the shareholders who wanted to sell the shares at a lower rate before
selling the company which would make the price of the shares high. No duty was indentified in
this situation. Thus, in case of Dhruv and Kristofer also the court would hold that there is no
individual duty owner. However there have been contradictory rulings made in the cases of
Coleman v Myers and Peskin v Anderson providing exception to the general rule. The exception
applies when it is visible that the shareholder is putting reliance on the directors for guidance or
when he shareholder is a vulnerable person. However the facts provided through the case study
does not depict any such reliance put by Dhruv on Kristofer. This would signify that the
exceptions provided in Coleman v Myers and Peskin v Anderson cannot be applied in the present
situation. Therefore, Kristofer was not required to disclose to Dhruv that the company is going to
be insolvent.
Thus, it can be stated evidently that Kristofer did not individually owe any duty to
Dhruve and no duty has been violated.

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Bibliography
Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 225 FLR
Coleman v Myers [1977] 2 NZLR 225
Corporation Act 2001 (Cth)
Gambotto v WCP Limited [1995] HCA 12
Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722
Percival v Wright [1902] 2 Ch 401
Peskin v Anderson [2001] BCLC 372
Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285