Director Duties: Altering Company Constitution and Insolvent Trading

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Question 1
Part A
Process of Altering the Company Constitution
According to section 136 of the Corporations Act the constitution of the company can be
amended through special resolution passed by the shareholders1. However, for the special
resolution to pass, at leat75% of the votes must be in favor the amendment. It goes without
saying that if 75% of the votes are in favor the amendment of the constitution; this decision will
bind the minority even if they voted against the amendment. It is instructive to note that the
special resolution to amend constitution will be binding if there are other additional requirements
spelled out in the constitution that should be met before the constitution is amended.
Expropriation of Minority Shares
There are certain amendments to the constitution that will not be binding even if passed by the
special resolution according to section 136 of the Corporations Act. These include; amendments
that provides for the variation or cancellation of class rights, amendments that are targeted at
expropriating the shares of violating the rights of the minority. The power of the majority
shareholders to amend the company constitution with a focus on expropriating the rights of
minority shareholders has been limited according to the High Court in Gambotto v WCP Ltd.
(1995)2. The court held that the power of the majority shareholders to amend the company
constitution wit a view of expropriating the rights of minority shareholders will be lawful if
a. It is exercised for a proper purpose
b. It is not oppressive with respect to the rights of the minority shareholders and;
c. It is considered to be fair and just
Further the court decided that the decision of the majority shareholder to expropriate the rights of
the shareholders through amending the constitution should only be exercised if there is
1 Corporations Act 2001
2 Gambotto & Anor v WCP Ltd (1995) 10 ACLC

disclosure of all the fundamental information to all the shareholder, an independent valuation of
the shares to be expropriated should be done by an expert. The reasoning inherent in Gambottoh
is that an amendment of the company constitution targeted at expropriation of the rights and
shares of the minority shareholder is only valid if the continued existent of the minority as a
shareholder is detrimental to the company.
Commentary
It is submitted to Amaya that although the resolution has ben passed by a majority o the
shareholder according to section136 of the Corporation Act it will not be binding. This stems
from the fact that the decision is oppressive and is a violation of her right as a minority
shareholder. Suffice say the power of Sammy and Huw to expropriate her shares as a minority
shareholder has been limited pursuant to the decision Gambotto v WCP Ltd. (1995). Sammy and
Huw’s decision to expropriate her shares was not made for a proper purpose since it was based
on the fact that she had become member of another rival company. It can also be argued that the
expropriation of Amaya’s expropriation of shares was not done in good faith and not for the best
interest of the company. Sammy and Huw made the amendment for their own benefit.
Conclusion
It is a plausible conclusion that Sammy and Huw will be bared from including the clause that is
focused on expropriating Amaya’s shares. It is apparent that the Sammy and Huw id not follow
the process of altering the constitution of the company set by law.
Part B
Promoters and Pre-Incorporation Contracts
Pre-incorporation contracts refer to a contract that has been entered to by a company that has not
yet ben registered. A business that has not been incorporated is not a separate legal entity and
lacks the legal capacity and powers that have been envisaged under Section 124(1) of the
Corporations Act 2001. On the other hand, a person who undertakes to form a company through