Corporate Law

This document discusses two scenarios related to corporate law. The first scenario involves the alteration of the constitution of Calamari Music Pty Ltd and whether it is enforceable against minority shareholders. The second scenario involves the expropriation of shares of Pearl and Marina by Callie and Marie of Calamari Music Pty Ltd. The second part of the document discusses the issues related to the loan agreement instituted with BankWest and whether it is binding upon Genki Ltd. It also discusses whether Business Brothers Pty Ltd is held by Genki Ltd as a subsidiary company.

Running head: CORPORATE LAW
Corporate Law
Name of the Student
Name of the University
Author Note

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Part A
Summary of Facts
In the current case it is seen that two musically talented sisters after years of touring open
our music store in Melbourne which is incorporated as a company named Calamari Music Pty
Ltd. Both sisters are the directors of the company and hold 30% each of the shares of the
company. The rest of the 40% share is held by three of the fans of the sisters, Pearl 10%, Marina
10% and Octavio 20%. Callie and Marie want to open a second Store and need more capital for
the growth of the business however they are reluctant to input the capitals by themselves. For
this reason a Special General Meeting is held by Calamari Music for the alteration of the
constitution. Indore alteration to declare all the shareholders who hold less than 15% of the
shares of the company for repairing the initial purchase price of the shares as additional capital
once each year. This alteration has been done with proper notice to all the shareholders to vote.
Out of all the shareholders three of them vote for the alteration and to minority shareholders vote
against the same. After a few days Ink Records Limited contacts Calamari Music Pty Ltd for
promoting Calamari music. Although there is a term Ink Records Ltd put for Calamari Ltd
which requires Callie and Marie to individually or jointly hold 80% of the shares in the company
effectively 10 days from signing the contract. Because of short time limit the directors Callie and
Marie and shareholder Octavio hold a quick Special General Meeting in which there is all to alter
the constitution to expropriate the share of all the shareholders owning less than 15% of total
share of the company. All three words are for the alteration and the very next day Pearl and
Marina are notified of this new change and are required to be transferring their shares to Callie
and Marie. There are two issues that can be raised in this current scenario. The first issue is

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whether the first constitutional alteration would be enforceable against Pearl and Marina. The
second issue is whether the second constitutional issue would be valid.
Question 1
Constitutional Alteration
Under section 136 of the Corporations Act 20011 a company can adopt a constitution by
registration if all the individual specified in the application for the registration of the company consent to
become members agreed in writing to the terms of the constitution before the application has been
lodged; after the registration by way of special resolution for adopting a constitution or by a court order.
Under subsection 2 of the section 136 of Act a company can modify or repeal the constitution or any
provision of the Constitution by special resolutions.
Under section 137 of the Corporations Act 20012 if a new constitution has been adopted or
existing constitution has been modified or repealed that adoption or modification or repeal would be
effective only if it is a result of a special resolution; on the date on which the special resolution has been
on the date on which the special resolution has been passed or on a date that has been specified or
determined in accordance with the resolution if the date is later than the date on which resolution has been
passed.
Section 140 (1) of the Corporations Act 2001 states that the company’s constitution or any other
replaceable rules that would be applicable to the company would have effect as a contract between the
company and each of the members, between the company and the director and company secretary, and
between the members of the company. Section 140 (2) states that unless agreed in writing any member of
the company would not be bound by the modification of the constitution after the date of becoming a
member as long as the modification request them to take up additional share or increase their liability to
contribute to the share capital or otherwise pay any kind of money to the company or impose or increase
1 Ibid, s.136
2 Ibid, s.137

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restrictions on the right of transfering the shares that have been held by them. The provision of the section
has been discussed in the case Bailey v New South Wales Medical Defence Union Ltd (1995).3
Advice to Pearl and Marina
In the given scenario it is observed that the constitution of the company was already enforced as
per the section 136 of the Corporations Act. For any amendment of the company’s constitution Calamari
Ltd would require to follow the provisions of section 136 (2) by passing special resolutions.
The first amendment of the company’s constitution would be effective under section 137 of the
Act as it was passed by way of special resolutions.
Applying section 140 in this scenario it can be said that the first alteration of the Constitution
could not be enforced against Pearl and Marina if they have not provided it in writing that they would be
bound by any constitutional amendments or alterations.
Thus Pearl and Marina are advised that they are not bound by the first alteration if they have not
provided in writing previously.
Question 2
Expropriation of shares
Section 127 of the Corporations Act 20014 states that execution offer document of the company
may be done without using the common seal of the company if the document has been signed by two
directors of the company; or one director and one Company Secretary; for a proprietary company that has
sole director who is also the sole secretary of that company.
3 Bailey v NSW Medical Defence Union Ltd (1995) 132 ALR 1
4 Corporations Act 2001, s. 127

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According to Section 128 (1)5 a person is entitled to be making exemption under section 129 in
relation to dealing with the company. However the company is not entitled to be a setting in the
proceedings of the dealings if any assumptions are incorrect.
According to Section 232 of the Act a Court has the right to make an order under section 233 if
any contact of the company or any actor remission either actual or husband proposed by the company or
by any resolution is seen to be contradictory towards the interest of any member or is discriminatory,
oppressive or prejudicial in an fair way towards any member or members of the company. The provision
of the section was discussed in the case Cody v Live Board Holdings Limited [2014].6
Further in the case Gambotto v WCP Ltd (1995)7 it was held that a company’s constitution could
be used for expropriation of the shares of a shareholder only for proper purpose which is not oppressive to
them.
Advice to Pearl and Marina for the validity of the expropriation of their shares
Applying section 127 in the given scenario it can be said that Callie and Marie big directors of the
company can execute a document without using common seal by signing the documents. Therefore their
contract with Ink Records Ltd would be valid.
However applying section 128 it can be stated that although Ink Records Ltd can make an
assumption for putting condition to Callie and Marie to maintain at least 80% of the shareholding of the
company yet the directors don't have the entitlement to give their assertion in the proceeding as the
assumption of them having 80% share is incorrect.
5 Ibid, s.128
6 Cody v Live Board Holdings Limited [2014]
7 Gambotto v WCP Ltd (1995)

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The second amendment of the company’s constitution would not be effective under section 137
of the Act as it was passed by way of special resolutions.
Applying section 232 in this scenario it can be said that 2nd alteration was against the interest of
Pearl and Marina and is discriminatory and oppressive towards them hence this alteration would not be
valid.
Applying the judgment of the case Gambotto v WCP Ltd (1995) in the case it can be said that
since expropriation is not for proper purpose and is oppressive towards Pearl and Marina as they were not
informed for the alteration of the constitution this expropriation is not valid.
Thus it can be concluded that the second alteration of the Constitution would be invalid as it is
oppressive and discriminatory towards Pearl and Marina and further is not for any proper purpose.
Part B
Issue 1
The issue arising from the given situation is whether the loan agreement instituted with
BankWest is binding upon Genki Ltd.
Execution of Documents
The principle enumerated in the CA 2001, s 127,8 requires every document being executed on
behalf of a company to be authorised by the signature of a minimum of two directors or a director and the
company secretary. Such a document would be regarded as valid even if no common seal has been
attached.
8 Corporations Act 2001, s.127

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Assumptions allowed to the Outsiders
The principle enumerated in the CA 2001, s 128,9 confers the right upon the individuals
considered as outsiders for the company to have the entitlement of making assumptions in relation to the
compliance of the company’s internal management in every dealings of the company instituted with them.
This contention comes in line with the principle enumerated with the decision of Soyfer v Earlmaze Pty
Ltd [2000] NSWSC 106810. According to this provision, the outsiders to the company has also been
entitled for the purpose of making assumptions with respect to the adherence of internal rules of a
company during the institution of dealings with them. The fraudulent activities or even an act of forgery
committed by a representative of the company will not affecting the contract of the company with
outsider if the outsider has not been under the suspicion of the activity to be fraudulent or the document to
be forged. This provision comes in line with the decision enumerated in the judgement of Cf Northside
Developments Pty Ltd v Registrar General (1990) 170 CLR 14611.
Assumption as to Internal Management
The principle enumerated in the CA 2001, s 129,12 the internal rules of the company is required to
be assumed by the outsider to have been completed by the internal management involved in the company.
This principle has also been extended in the judgement of Brick & Pipe Industries Ltd v Occidental Life
Nominees Pty Ltd (1992) 10 ACLC 25313. When it has been represented by the company that a person has
the authority of acting under the name of that company, the outsiders will also have the entitlement of
assuming such a contention to be correct.
Doctrine of Indoor Management
The individuals who are outsiders to the company are not required to enquire the adherence of the
internal management pertaining to a company towards the rules that has been internally enumerated for
9 Ibid, s.128
10 Soyfer v Earlmaze Pty Ltd [2000] NSWSC 1068
11 Cf Northside Developments Pty Ltd v Registrar General (1990) 170 CLR 146
12 Corporations Act 2001, s.129
13 Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253

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the running of the management of the company during its transactions with the company. This rule can be
supported with the case of Royal British Bank v Turquand [1856] 6 E&B 327.14 This principle is referred
to as the doctrine of indoor management and has also been extended in the case of Morris v Kanssen
[1946] AC 45915. Moreover, the incorporation of a company casts a corporate veil upon the company,
which requires the outsiders or the courts to pierce the same and identify the internal actors behind the
company.
Analysis
The facts of the case has made it evident that Genki Ltd has been involved in the sale of high end
medical equipments as well as machines to the hospitals and has been incorporated as a public company.
The board containing the directors comprised of five directors namely Percy, Sam, Kenta, Ryota and
Shali. Percy, Shali as well as Sam has been designated as the non executive directors. The daily affairs of
the company has not been conferred upon them. The executive managing director of the company were
Ryota and Kenta. Ryota and Kenta were the identical twins. Although they have been managing the
company effectively but the lack of knowledge pertaining to the English language of Ryota has caused
the company substantial trouble for the contract he has effected without a proper understanding of the
same under the name of Genki Ltd. This has made the other directors to decide at a meeting that Ryota
needs to have a consultation with the other directors while instituting any transactions with third party
exceeding the value of $10,000. This decision has made Ryota angry and disappointed. This has been the
activities happening in the internal management of the company. The outsiders who have been transacting
with the company are not to be concerned with the investigation of the activities that has been going on in
the management of the company internally. This comes in line with the case of Morris v Kanssen [1946]
AC 459.
To make Ryota feel better, Kenta has delegated him to make consultation with Sam for the
purpose of organization of a loan for the company to be availed from BankWest amounting to $50000.
14 Royal British Bank v Turquand [1856] 6 E&B 327
15 Morris v Kanssen [1946] AC 459

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The loan is to be availed by the usage of a non-circulating interest in a piece of expensive factory
equipment in form of a security with respect to the loan. The execution of the same has been conferred
upon Ryota by his brother for the purpose of showing faith upon him and does not have to rely upon the
decisions of the board for the same. The BankWest has also been informed by Kenta regarding the
authority of Ryota in availing the loan under the name of the company. This needs to be construed as the
representation made by the company in relation to the authorization that has been extended to Ryota to
represent the company and transact in its behalf. This needs to be construed as per the judgement of Brick
& Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253, which states that when it
has been represented by the company that a person has the authority of acting under the name of that
company, the outsiders will also have the entitlement of assuming such a contention to be correct.
Again, it has been mentioned that Ryota is an identical twin of Kenta has been clearly authorized
by Kenta to execute the contract of loan with the bank. The document for the purpose of availing the loan
has been duly singed by Ryota and on being asked regarding the signing of the document by two directors
for availing the validity of the same under CA 2001, s 127, Ryota made the forgery with respect to the
signature of his brother and availed the loan. This makes the bank to make assumption of the validity of
the transaction as per the judgement of Cf Northside Developments Pty Ltd v Registrar General (1990)
170 CLR 146. Hence, the loan agreement instituted with BankWest is binding upon Genki Ltd.
Advice
The loan agreement instituted with BankWest is binding upon Genki Ltd.
Issue 2
The issue arising from the given situation is whether the Business Brothers Pty Ltd has been held
by Genki Ltd as a subsidiary company.

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Subsidiary Company Definition
The principle enumerated in the CA 2001, s 46,16 defines the term subsidiary company. A
subsidiary company is depicted as a company that has been held by another company referred to as the
holding company of the former. The company referred to as the holding company is under the obligation
to carry out the governance and control pertaining to the board of the subsidiary company. The company
depicted as a holding company is also to be construed to have the possession of fifty percent of the voting
rights in the company it has been holding as its subsidiary to the minimum. It also needs to have the
possession of fifty percent of the voting rights in the company it has been holding as its subsidiary to the
minimum.
Genki Ltd and Business Brothers Pty Ltd
The Business Brothers Pty Ltd should not be construed to be the subsidiary company of Genki Ltd. This
is because, it has been held by Kenta and Ryota and not by Genki Ltd. Although Kenta and Ryota has
been owning the fifty percent of the shares, but the same has not been owned by the company.
Hence, it can be stated that Business Brothers Pty Ltd should not be construed to be the subsidiary of
Genki Ltd.
16 Corporations Act 2001, s.46

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Reference
Bailey v NSW Medical Defence Union Ltd (1995) 132 ALR 1
Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC 253
Cf Northside Developments Pty Ltd v Registrar General (1990) 170 CLR 146
Cody v Live Board Holdings Limited [2014]
Gambotto v WCP Ltd (1995)
Royal British Bank v Turquand [1856] 6 E&B 327
Soyfer v Earlmaze Pty Ltd [2000] NSWSC 1068
The Corporations Act 2001 (Cth)