Business Law: Pre-registration Contracts, Directors' Duties and Share Expropriation

This article discusses pre-registration contracts, directors' duties and share expropriation in business law. It explains the legal requirements and implications of these concepts with relevant case laws. The article provides expert guidance on Desklib for students and professionals.

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

1BUSINESS LAW
Part 1A
Section 136 of the Corporation Act (Amendment of constitution)
Rules in relation to the process in that the company’s constitution can be changed are
given by the Corporation Act 2001 (Cth). Under the CA the constitution has been said to be the
key document that sets the relation of the owners with third party, organization and among the
members. A particular process is there that is required to be complied with to change the
constitution and these changes has been set out in the section 136 of CA1.
Section 136 of the Corporation Act (Process for alteration)
The section 136(2) of CA had stated that the company’s constitution might be modified
through a special resolution2. The section 136(3) of the Corporation Act has further stated that it
might be given by the constitution that no effect will be there of the special resolution until the
requirement that was mentioned in constitution has been complied with regards to its repealing
or modification3. It has been additionally clarified that until the constitution gives denial, the
company will modify and repeal the requirement that has been mentioned under the section
136(3) in case that need is satisfied it4.
The Gambotto v WCP Limited Case
The rights of the majority owners have been limited by the court in the case of Gambotto
v WCP Limited5, to change the constitution with regards to the share expropriation. The judges
in the given case had stated that the constitution's alteration to expropriate the minority’s shares
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

2BUSINESS LAW
will only be legal if it has been done for an appropriate reason and it will not be unfair to the
minority owners. The court had further clarified in this given case that the share expropriation
has been permitted in situation where the minority members act in such a manner that is
unfavourable for the organisation or they have been competing with company. The change in the
constitution will not be approved if the company’s directors are getting into this for their
commercial advantage.
Whether the amendment of the company Oh My Private Limited is valid?
The initial requirement is the special resolution to change the constitution under the section 136
of the Corporation Act. The meaning of the special resolution is voting done by the 75% of the
company's owners. In the given case, Huw and Sammy have 90% company’s shares and
therefore they hold the right to pass the special resolution for changing the constitution via the
section 136 of the Corporation Act. Furthermore, no requirement has been provided by the facts
that can prevent the changes of the constitution under the section 136 of the Act. However, the
implementation of the given case Gambotto v WCP Limited is also necessary to evaluate the
legality of the amendment that has been done by Huw and Sammy. It is given by the facts that
the changes is being held with regards to the shares expropriation of those people who hold
lower than 11% shares and in the given case it’s Amaya.
In the given case, the court had stated that the expropriation will only be legal of it has
been done for the proper reason and it will not be unfair to the minority owners. In the given case
it may be said that expropriation has been unfair to Amaya as she is the minority shareholder.
The court had further clarified in this given case that the share expropriation has been permitted
when the members in minority act in such a manner that is unfavourable for the organisation or

3BUSINESS LAW
they have been competing with company Amaya is acting as an accountant for the company’s
competitors. Amaya is trying to contact Gracey so that she can take podcasts to some other
organizations. Therefore, it is obvious that Amaya having competition with the organisation and
the constitution's alteration will be therefore legal.
Part 1B
Pre-registration Contracts
The rules that are in relation to the pre-registration contract have been given under the
provisions of the section 131 of the CA 2001. The section 131(1) of this Act states that if an
individual has or wants to form a legal agreement on behalf of the organisation or for its benefit
before the registration, then the organisation has to abide by the contractual terms and is
permitted to gain the benefits of the organisation or an organisation that is reasonably identifiable
with it that helps the contract to ratify6. Within a specific period of time, the ratification must be
done to that the parties in relation with the legal agreement have approved or a prudent time if no
agreement is there.
In addition, it is clarified under the section 131(2) of the Corporation Act 2001 that an
individual is responsible for the compensation that he needs to provide to that party who has
been registered before contract of the organisation do not ratify the legal agreement within the
given time or if it is not incorporated. The amount of the compensation will be that amount
which the organisation would have paid if the legal agreement was ratified by the organisation
and was breached7.
6 Corporation Act 2001 (Cth) s 131(1)
7 Corporation Act 2001 (Cth) s 131(2)

4BUSINESS LAW
In case, the proceeding is there that is brought with regards to the section 131(2) of the
Corporation Act 2001, the courts holds the power if it gets recognised even though the
organisation is registered, the contract is not being ratified or has gone to a replacement of it, to
do such things that is considered to be appropriate in the circumstance under the section 131(3)
of the Act. This might include paying the part of the damages or all of it that an individual is
legally responsible to pay, return the received property under the legal agreement and pay the
compensation to another party of the contract8.
Furthermore, under the rules that has been provided under the section 131(4), if a
registered before contract has been ratified by the company and it cannot perform it in part or
altogether then the court can order the individual to pay for those damages that the organisation
needs to pay9.
Legal agreement with Gracey
The information that has been stated in this case specifies that a contact was formed
between Huw and Gracey in which it has been mentioned that Gracey is supposed to be paid
with the amount of $4000 every month for a month period with regards to the rules of the weekly
podcasts. This is done on the date 20th of April 2018 and was done on behalf of Gosh. The
disadvantage was that this name Gosh did not exist and the registration of the organisation had
been done in the name of Oh My Private Limited. This states that the company Oh My Private
Limited is that organisation that is prudently noticeable with the name Gosh. The legal
agreement was formed before the company’s registration and therefore under the section 131 of
the Corporation Act 2001 it is said to be the pre-registration contract. If an individual has or
8 Corporation Act 2001 (Cth) s 131(3)
9 Corporation Act 2001 (Cth) s 131(4)

5BUSINESS LAW
wants to form a legal agreement on behalf of the organisation or for its benefit before the
registration, then the organisation has to abide by the contractual terms and is permitted to gain
the benefits of the organisation or an organisation that is reasonably identifiable with it that helps
the contract to ratify. However, the contract was not ratified by the company Oh My Private
Limited.
The above statement means that under the rules of the section 131(2), Huw has to pay
compensation to Gracey because no ratification was done on this circumstance and Gracey had
decided to claim. In addition, the implementation of the section 131(3) signifies that if a claim is
made by Gracey then the court might ask the organisation to pay a part or all the damages that
Huw is legally responsible to pay Gracey and return the received property under the legal
agreement and pay the compensation to another party of the contract. Furthermore, in the section
131(4), the court can ask Huw to give compensation to Gracey if it is seen that the company Oh
My Private Limited has ratified the legal agreement with Gracey and he has violated the legal
agreement.
Part 2A
Duties of the Directors
Several duties are there that have been enforced on the directors through the action of the
Corporation Act 2001 and common law. There are two types of duties that have divided into
general duties and statutory duties. There is a duty under the common law in which the directors
must act bonafide and for a reasonable purpose and assure the company’s best interest. These
duties are mentioned in the Corporation Act 2001 by the provisions of the section 181.
Section 181 of the Corporation Act

6BUSINESS LAW
The duty is with regards to director’s good faith and the other officers. In the section
181(1) of the Act it has been stated that an officer or the director of an organisation must exercise
their powers and release their duties for a reasonable purpose and act bona fide towards the best
interest of the company10. In case this section is breached then it will results in the provisions of
the civil penalty that has been given in the section 1317E of the Corporation Act11.
In the case named Kinsela v Russell Kinsela Pty Limited the rules of the breach of this
section have been discussed. In the given case, it has been stated by the court that company’s
best interest do not include the owner’s interest. However, the creditor’s interest must be
considered when the organisation is about to get bankrupt or is insolvent. Furthermore, in the
case of Whitehouse v Carlton Hotel Pty Ltd, it has been stated that the powers that the directors
use must be only for a planned purpose. In situation where the act has not been considered of a
reasonable purpose by an prudent individual then the court has the right to recognize the
violation of the above-mentioned section as mentioned in the given case Bell Group Ltd (in liq) v
Westpac Banking Corp (No 9).
Breach through the directors of the company Drink It Up Pty Ltd
In this situation, it has been given that the directors of the company named Drink It Up
Pty ltd have taken a decision to make a new organisation because they have been facing loss in
their business of fruit juice and they have been making profit in their business of spring water.
Every asset has been passed with respect to spring water to their new company and it has been
named as H2O Pty Ltd. This new company was formed to prevent the financial difficulty that the
Drink Company was subjected to with respect to pay the creditors in the business of fruit. In the
10 Corporation Act 2001 (Cth) s 181(1)
11 Corporation Act 2001 (Cth) s 1317E

7BUSINESS LAW
section 181 of the Corporation Act it has been stated that the directors must act bonafide and for
an appropriate reason for the best interest of the company. In the present circumstances, an
appropriate reason can be seen by the court independently according to the case of Re S & D
International Pty Ltd (No4)12. Any prudent person will not understand that this action is for a
planned reason was given by the case of Australian Securities & Investments Commission v
Adler13 An attempt was taken by the directors to deceive the creditors. This act was not at all
considered to be in the company’s best interest as given in the rules of the case Hodgson v
Amcor Ltd14. The company named Drinks have subsequently been injured and it may be
mentioned that the act that entered by their directors was not for a good purpose to divide the
organisation and was not bona fide for Drinks' best interest. Therefore, the directors of this
organisation have breached the section 181 of the Corporation Act 2001. They need to pay fine
amounting to $200000 under the section 1317E of the Act or it can be forbidden to manage the
organisation under the section 206C of the Act.
Part 2B
The Duties of the Directors to Individual Owners
The court had stated in the case named Percival v Wright15 that the company’s directors
have only been imposed with general duties with respect to the organisation altogether and not to
the individual owners. In the given case, the shares have been bought by the company’s directors
from the owners who intend to trade the shares at a low cost prior selling the organisation that
12 [2010] VSC 388
13 (2002) 168 FLR 253
14 [2012] VSC 94) at [1339].
15 [1902] 2 Ch 401

8BUSINESS LAW
will help in raising the shares’ price. It was held by the court that no breach of duty was there by
the directors become they do not oblige with the duties to the individual owners.
However, the court did not follow the above mentioned decision on the case named
Coleman v Myers16. The court stated in this case that the directors have fiduciary duty towards
the owners in which they have to reveal all the materialistic facts with respect to the offer that
might change the mindset of an individual to get in the transaction. In the case named Peskin v
Anderson17, this situation was discussed. In the given case the court had stated that an exception
is there to the general rule as given in this case. This will happen when the circumstance is like
that a big duty has been owed through the directors to an individual shareholder where it is seen
that the owner is depending on the directors for such assistance or when the owner is a helpless
individual.
In addition, it has been given in the section 588G of the Act that the directors must not
get involve in trading after knowing that the organisation is bankrupt. In case the directors have
involved themselves in such conduct that can be taken as insolvent trading, the directors might
be personally responsible for the loss that was sustained by the investors.
Breach of the duties of the directors through Kristofer
Whether Kristofer has violated the duties of the directors or not, will depend on whether
he had owed any kind of duty to Dhruv individually. In the situation, the implementation of the
case named Percival v Wright will clear the information that the company’s directors have the
general duties enforced on then with respect to the organisation altogether and not to the
individual owners. Here, the case facts are same as the information in hand. In the given case, the
16 [1977] 2 NZLR 225
17 [2001] BCLC 372

9BUSINESS LAW
shares have been bought by the company’s directors from the owners who intend to trade the
shares at a low cost prior selling the organisation that will help in raising shares’ price. In this
given situation, no duty was seen. Therefore, in the case of Kristofer and Dhruv, the court held
that no owner is there of the individual duty. However, there are no conflicting rules that were
made in the case named Peskin v Anderson and Coleman v Myers by giving an exception to the
common provision. An exception is there when it can be seen that the owner is depending on the
directors for such help or when the owner is a helpless individual. However, the information that
has been given by this case does not portray any dependence that was put on to Kristofer by
Dhruv. This signifies that the exception given in that case Peskin v Anderson and Coleman v
Myers cannot get applied in this circumstance. Thus, the insolvency of the company was not
supposed to be disclosed in front of Dhruv by Kristofer.
Therefore, evidently it can be said that no such duty was owed individually by Kristofer
to Dhruv and there was not breach of duty.

10BUSINESS LAW
Bibliography
Australian Securities & Investments Commission v Adler (2002) 168 FLR 253
Coleman v Myers [1977] 2 NZLR 225
Corporation Act 2001 (Cth)
Gambotto v WCP Limited [1995] HCA 12
Hodgson v Amcor Ltd [2012] VSC 94) at [1339].
Percival v Wright [1902] 2 Ch 401
Peskin v Anderson [2001] BCLC 372
Re S & D International Pty Ltd (No4) [2010] VSC 388