Legal Regulation and Business Structure - Desklib

This article discusses legal regulations and business structures under the Corporation Act 2001. It covers topics such as altering a company's constitution, provisions for pre-registration contracts, breach of director's duty, and liability of directors towards individual shareholders.

Running head: LEGAL REGULATION AND BUSINESS STRUCTURE
Legal Regulation and Business Structure
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1LEGAL REGULATION AND BUSINESS STRUCTURE
Table of Contents
Question 1........................................................................................................................................2
Part 1A.........................................................................................................................................2
Part 1B.........................................................................................................................................4
Question 2........................................................................................................................................6
Part 2A.........................................................................................................................................6
Part 2B.........................................................................................................................................8

2LEGAL REGULATION AND BUSINESS STRUCTURE
Question 1
Part 1A
The process to alter the constitution of a company
The Corporation Act 2001 lays down the rules and regulation for registering as well as
altering a company’s constitution1. There are intricate procedures that needs to be followed to
change the constitution. The constitution of a company binds the members of such company
together, giving a feel to unity, while it also ties them together with the third parties with whom
the company transacts. The constitution helps both parties to keep a clear picture of each other’s
motto and purpose to operate. It also helps settle dispute between parties in case of a
disagreement or breach of contract. Therefore, it is not only important to incorporate a
constitution, it is also vital to amend it as per necessary requirement from time to time. Section
136 of the Corporation Act (CA) empower corporations to alter constitution as per necessity2.
Section 136(2) of CA states that, the company or its directors need to pass a special resolution for
altering a company’s constitution3. Section 136 (3) of the Act lays down the compliance rules
that the company needs to abide by to alter the constitution.4 The directors may alter the
constitution to add a certain clause to protect the best interest of the corporation.
It was held in the landmark case of Gambotto v WCP Limited, the court held that the
directors cannot buy back shares of the minority shareholders by the way of changing the
constitution5. It was observed by the judges that such buying back shares from the minority
shareholders through the trick of adding a clause to the constitution constitutes unethical and
oppressive toward such minority shareholders. Alteration of the constitution for the inclusion of
the provision of buying back shares is not permitted by the court unless the directors can show
vital reasons for such inclusion, which is for the benefit of the corporation. The court would only
allow such changes considering the position of the company, to save it from monetary injury or
reputational issues. In Allen v. Gold Reefs of West Africa, the test of the duties of the directors
1 Corporations Act 2001 (2018)
2 Corporation Act 2001 (Cth) s 136
3 Corporation Act 2001 (Cth) s 136 (2)
4 Corporation Act 2001 (Cth) s 136 (3)
5 [1995] HCA 12

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towards protection of the minority shareholder. Lindley MR, stating that a director must exercise
his duties not only as prescribed by law, but also ‘bona fide for the benefit of the company as a
whole’ and it should not exceed its average standard of care, discussed it for the first time6.
McLelland J held that such alteration of constitution would be fair if it is ’bona fide for the
benefit of the company as a whole’. Citing Peter’s American Delicacy Co v. Health, His Honour
stated that this test of good intention and purpose is not conclusive, as the interest of different
classes of shareholders needs to be taken into account7.
While, the minority shareholders need to highlight the fact that the directors intend to incur
personal gain out of such alteration of constitution to stop the directors from making such
changes. The aggrieved party needs to cite to the court that the corporation has not followed the
prescribed way of making the amendments, which involve holding special resolution meetings
that includes the vote of the minority shareholders as well8. However, it requires the vote of 75%
of the shareholders and does not include the ones below 11%9.
In this case, Kody and Ryder holds 90% of the shares together, which gives them the
authority to pass a special resolution and alter the constitution without involving Salman who
only holds 10% of the shares in the company.
Advice to Salman
Since the two directors hold 90% of the shareholding in the company, therefore they have
the power to change the constitution for the interest of the company when they found out that
Salman was consorting with a competitor company. Under section 136 and 136 (2) of CA, the
directors have the authority to exclude Salman and make the necessary changes to insert the
clause of buy back shares of the minority shareholder, holding shares below 10%. Thus as per
the provision of the CA, it was not illegal or unethical on Kody and Ryder’s part to make the
amends. Such act of alteration saved the company from material loss and injury.
6 [1900] 1 Ch 656
7 [1939] HCA 2
8 Corporation Act 2001 (Cth) s 136
9 Corporation Act 2001 (Cth) s 136 (2)

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The intention of the directors are however, inquired into by the court of law for it is likely
to be collusive and malicious in most cases. The directors are generally found to be making
changes for their personal gains, injuring the minorities. However, in this case, Kody and Ryder
followed the letters of the law to save the company from the malicious intentions of Salman.
Salman was working for the competitor company as an accountant and inducing Melanie to work
for that company as well. This is unethical and illegal on her part, which is substantial enough to
disqualify her eligibility to sue Astounding Gifts Pty Ltd or its directors. Therefore, Salman
cannot prevent the inclusion of the clause of buy back shares for her own collusive conduct.
Part 1B
Provisions for pre-registration contract
Pre-registration contracts are subject to ratification. The Corporation Act 2001 provides
for the provision of the pre-registration contracts and their ratification by the parties to the
contract10. After such contracts have been signed, it is compulsory for the parties to perform it.
Section 131(2) of the Act entitle the parties to execute the contract and reap its benefits as well,
following the procedural requirements though11. A formal ratification of the pre-registered
contract is a mandate under section 131(2), which requires the parties to ratify such contract
within a mutually agreed date or a reasonable period after the corporation is registered. The party
that fails to ratify it is liable to pay compensation to the other on non-performance of the
contract. Section 131(3) of CA directs the compensating party to pay the damages in full at one
time or in installments for a certain period12.
Even though the statute says that pre-registration contracts are legally binding, yet
various precedents exists that relieve parties from further execution after the company comes
into existence, as they consists of extinguishing clauses incorporated in such pre-registration
contracts13.
10 Corporation Act 2001 (Cth) s 131
11 Corporation Act 2001 (Cth) s 131(2)
12 Corporation Act 2001 (Cth) s 131 (3)
13 77 L. J. 790 (1908)

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Advice to Melanie
In this case, Astounding Gifts Pty Ltd had entered into a pre-registration contract with
Melanie, which they fail to ratify even after the company was registered. On the other hand,
Melanie have breach the contract with Astounding Gifts Pty Ltd of supplying her work to them,
instead she supplied them to its arch competitor. Therefore, it can be held that both parties have
breach their duties to perform the contract differently. Astounding Gifts Pty Ltd will be liable to
pay Melanie her share of monthly remuneration and other damages for not ratifying the contract.
While Melanie can be held liable to compensate the company for breach of contract. The
company will be liable to pay her wholly at a go or partly from time to time as per Melanie’s
claim for violating the provision laid down in section 131 of the Corporation Act. The company
can bring charges against Melanie to pay damages.

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Bibliography
Corporation Act 2001 (Cth)
Gambotto v WCP Limited [1995] HCA 12
Peters' American Delicacy Company Limited v Heath [1939] HCA 2
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656
Re National Motor Mail Coach Co., 77 L. J. 790 (1908)

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Question 2
Part 2A
Breach of director’s duty under Corporation Act 2001
Common law lays down the moral duties of an employer toward his employees. These
general duties are common to any kind of institution. While statutory legislations shapes the
unwritten common law principles and incorporate them as codified rules and regulations for
modern day usage. Section 181 of the Corporations Act 2001 states the duties of the director and
other officers in a corporation14. The directors are supposed to abide by the provisions laid down
in this section and execute them accordingly. As per this section, the directors are meant to
execute their duties in ‘good faith’. While Section 181 (1) of CA directs the officers and directors
of the corporation to act reasonably with due ‘care and diligence’15. Violation or breach of the
prescribed duties would result to penalty of the director responsible for such breach. Section
1317E of CA lists down penalties for several types of breach and violation of duties by directors
and officers under the Corporations Act 2001.
In ASIC v Adler, the directors were held liable to breach the following provisions under
the CA:
 Section 180: It lays down the duty of the director to execute his duties with care and
diligence.
 Section 181: it asks the director to carry out his duties bona fide.
 Section 182: refrains the director to misuse their position.
 Section 183: refrains director to use the information received by way of his position as a
director in an inappropriate way.
 Section 206A: lays down the duties of the director regarding his financial responsibility
toward the corporation16.
14 Corporation Act 2001 (Cth) s 181
15 Corporation Act 2001 (Cth) s 181 (1)
16 [2002] NSWSC 171

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In Hutton v. West Cork Railway Co, it was observed by the court that the directors have
limitation to spend fund of the company for the benefit of non-shareholders. The court
ascertained this case on the basis of the fact that an insolvent company still holds certain duties
towards the employees17.
In Australian Metropolitan Life Assurance Co Ltd v Ure, it was observed that the directors
have discretion to choose parties for the legit transfer of shares of the corporation18.
Therefore, the provisions for the director’s duty and the breach of such duty laid down in the
Corporation Act is to be followed by the directors to avoid the violation of such provisions and
thereafter attract penalty.
Advice to Archibald
Chip-Eze Pty Ltd had two sections of its business, one dealing with making potato crisps
and other snacks while the other dealt with the manufacture of frozen potato chips. It formed a
new company and transferred its substantial assets to such company as it suffered a heavy loss in
its potato crisps business while made profit in the frozen potato chips venture. They named the
new venture as Freeze Me Pty Ltd. It is quite clear that the company indulged into such a
substantial change for it had a huge credit amount due to several creditors due to the loss
sustained in the potato crisps business. They severed the business from its previous transaction
route to evade the creditors. However, in Bell Group Ltd v Westpac Banking Corporation, it was
held that the financers put risk while investing in a corporation and they intend to incur profit out
of such engagement. Therefore, it is the duty of the director to act accordingly so that such risk
of the financer is not wasted. Thus, the attempt to evade liabilities and loss suffered from
previous business would not let the directors escape the clutch of legal obstacles. In such cases,
the directors cannot take the defense of protecting the corporation from probable injury, as it
would be intended that a company could not exist by defrauding the claim of its creditors. It
would held as an offense under civil law, law of tort as well as under the Corporation Act to
17 [1883] 23 Ch D 654
18 [1923] 33 CLR 199

9LEGAL REGULATION AND BUSINESS STRUCTURE
escape the credits a company needs to pay to its creditors. Under section 1317E of CA, the guilty
directors would be liable to pay damages to the creditors.
Therefore, it is advised to Archibald to liquidate the new company in his capacity as the
official liquidator appointed by the court. Archibald must penalize the company for evading the
creditors of their rightful claim over her investments. Under the section 1317E, the directors
would be penalized that involves a monetary compensation that might extend up to $200000 or
the directors may be banned from their respective positions19.
Part 2B
Determination whether as to the directors hold liability towards individual Shareholder
The directors of a company is vested with several duties and responsibilities under the
Corporations Act, yet they are not liable to execute duties pertaining to individual shareholders.
They are only supposed to carry out responsibilities toward the company and not to any one in
particular. In the case of Percival v. Wright, it was held that the directors cannot be held
responsible or dutiful towards individual shareholder20. It was observed that a director has the
right to buy back share from a shareholder when such shareholder wants to sell off his part and
therefore puts trust upon such director. The director is not under any obligation to let the
shareholder know about the probable liquidation of the company while buying the shares back
from an individual shareholder. Nonetheless, it is to be looked after that the director does not
possess any personal interest or coerce a shareholder to sell his part. In addition to, it is to be
made sure that the shareholder selling his share must be vulnerable and thus puts his trust on the
director.
However, this observation was overruled in Coleman v Myer. In this case, it was held that
on certain circumstances the director must execute specific responsibility toward individual
shareholders21. More so, it is to be followed when it is clearly seen that such shareholder puts a
sense of trust over the director to buy back his part of shares. The court held that the directors are
liable to disclose information to the individual shareholders about the corporation, which are
19 Corporation Act 2001 (Cth) s 206C
20 [1902] 2 Ch 401
21 [1977] 2 NZLR 225

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significant for the transfer of such shares. It is solely due to the trust that an individual
shareholder might hold upon a director.
Section 588G of the Corporation Act 2001 refrain the directors from carrying out
insolvent trading for such illegal trading would penalizes the directors22.
Advice to Faizah
It is alleged by Faizah that Jordon had breached his duty as a director. However, it is not
clear whether Jordon had any duty towards Faizah on the first place. Jordon bought the shares
that Faizah offered to sell not knowing the fact that the company was on the verge of liquidation.
In this case, it cannot be established that Faizah had put trust on Jordon for some serious issue
that she was going through when she offered such transfer. In no way can it be proved that she
was in a vulnerable condition. Therefore, following the rule of Percival v Wright, it can be said
that it was no wrong on Jordon’s part to disclose the fact of the company’s winding up. Charges
Therefore, Faizah cannot bring charges upon Jordon or any other director that they have
infringed their duty in the capacity of a director.
22 Corporation Act 2001 (Cth) s 588G

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Bibliography
Australian Metropolitan Life Assurance Co Ltd v Ure [1923] 33 CLR 199
Australian Securities and Investments Commission v Adler [2002] NSWSC 171
Bell Group Ltd v Westpac Banking Corporation (No 9) [2008] WASC 239
Coleman v Myers [1977] 2 NZLR 225
Corporation Act 2001 (Cth)
Hutton v West Cork Railway Co [1883] 23 Ch D 654
Percival v Wright [1902] 2 Ch 401