Legal Analysis of Company Law Issues in Two Scenarios

Question 1
A. Advice for Salman
In this part of the question, the process related with the Constitution of the company needs to be
examined and at the same time. It needs to be seen if Salman can prevent the other directors of
the company from including a clause in the Constitution. According to which a power has been
given to the directors to expropriate her shares.
The law provides that the company can modify or repeal its constitution with the help of a
special resolution passed by the shareholders. That resolution has to be passed by at least 75% of
the shareholders. This situation can be compared with other types of contract where all the
parties should agree to an amendment in the contract. Therefore, with the help of 75% Majority,
it is possible to amend the constitution of the corporation.1 It needs to be mentioned that such
amendments will be binding for the minority shareholders even if they may have voted against
the amendment, unless the common law, constitution or statutory protections provide for any
additional requirements.
After the decision given in Gambotto v WCP, certain limitations have been placed on the power
enjoyed by the majority shareholders of amending the Constitution in order to expropriate the
shares of minority shareholders. In view of this decision, it is necessary that any amendment
made to the constitution to give power to the majority to expropriate shares of minority can be
considered as valid only if the power has been given a proper purpose and the power does not
1 H A J Ford and R P Austin, Ford and Austin’s Principles of Corporations Law (Butterworths, 7th ed, 1995) 262

operate oppressively for the minority shareholders.2 Therefore it is necessary that the power
should be fair under the circumstances.
In this case, a members' meeting was called by Kody and Ryder. In this meeting a resolution was
passed in order to other demonstration of Astounding Gifts and to provide that the directors of
the company have a power to decide to buy back the shareholding of less than 12 percent.
However, as required by law it is necessary that any amendment made in the Constitution to
provide power to the directors to expropriate the shares of of the minority or valuable rights that
are attached to the shares, it is necessary that the amendment should have been made for a proper
purpose. Moreover, it is also necessary that the amendment should not be unfair for the minority
shareholders.
In view of these requirements, Salman can prevent the company from introducing a clause in the
constitution of the company which gives a right to the majority to expropriate the shares of the
minority.
B.
It needs to be seen if Melanie can enforce the contract against Astounding Gifts Pty Ltd that has
been created by Ryder in the name of Incredible Gifts Pty Ltd.
According to the law, before a company has registered, it cannot become a party to the contract.
As a result, a pre-registration contract can be described as a contract that has been created by a
person on behalf of or purportedly on behalf of the company we work the same has been
registered with the ASIC. In this regard, it has been provided by the Corporations Act, 2001 that
2 R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 15th ed, 2013) 432

it is possible for a company to ratify a preregistration contract after it has been created. In such a
case the contract dated before the recession of the company becomes binding for the company.
At the same time, liability has been imposed by the Corporations Act on the person who has
created the contract on behalf of the company, to compensate the company in case any laws has
been suffered by a third party as a result of the fact that they registered company fails to ratify
the contract or it fails to perform the obligations imposed on the company under the ratified
contract.3 In case of such a liability, a person may seek release from liability towards the third-
party the person has no right of indemnity against the corporation. It has been provided by the
law that where the registered company fails to ratified the contract later on, an order may be
issued by the court that it considers to be appropriate under the circumstances. Such order
includes an order according to which certain actions have to be taken by the company. It also
needs to be noted that any rights or liabilities that may be available to a person otherwise, on
account of a preregistration contract have been replaced by the rights and obligations that have
been provided in the Corporations Act.
In this case, Ryder had entered into a contract with Melanie on behalf of Incredible Gifts Pty Ltd.
This company was yet to be registered. Therefore, when the parties went to register the company,
they came to know that the name Incredible Gifts has already been taken by another company.
As a result they decide to register their company under the name of Astounding Gifts Pty Ltd.
The company started to pay $5000 per month to Melanie. But in July, the board of the company
decided that the company will refuse to continue to make the payment to Melanie. Under these
circumstances, it can be said that in the present case, the promoter of the company, Ryder had
delegated contract with Melanie. Although the name used in the contract was Incredible Gifts,
but later on, the company was registered in the name of Astounding Gifts. Therefore it can be
3 H A J Ford, Principles of Company Law (Butterworths, 2nd ed, 1978) 345