Legal Regulation of Business Structure

This research paper covers brief statements about the legal terms that are provided to different parties, which is Amaya in the first case. It also focuses on discussing the penalties or remedies to be experienced by the directors of ‘Drink it UP Pty Ltd’.

1Running head: LEGAL REGULATION OF BUSINESS STRUCTURE
Legal Regulation of Business Structure
Author’s Name
Tutor’s Name
Institutional Affiliation

2LEGAL REGULATION OF BUSINESS STRUCTURE
Legal Regulation of Business Structure
Introduction
Based on the Application of the Law, Article 1, which is similar to that of the court,
business organizations also follow legal laws that are based on their economic activities. These
regulations of the business organization play a major role in carrying out different economic as
well as business practices. In fact, it acts as a license to perform operational activities within their
national boundaries. Additionally, it also perceived as an identity of their existence1. Business
laws further help the business organizations to identify any existence of unethical practices as
well as its consequences. Responsibility of person or a director of an organization is addressed
by the business law. On an overall basis, any type of conflict within the organization or against
other organizations is solved through business laws2. Focusing majorly on these business laws,
this research paper covers brief statements about the legal terms that are provided to different
parties, which is Amaya in the first case. A statement is justified whether she can stop the
directors from including clause to confiscate her shares from the company as per her one year
contract. On the other hand, the study also focus on discussing the penalties or remedies to be
experienced by the directors of ‘Drink it UP Pty Ltd’, as they have breached the law of s181 of
the Corporations Act 2001 (Cth) as well as their equitable duties. It also projects reasons whether
action can be taken in case of breach of directors duties for selling the shares prior to going
through liquidation3.
Question 1 Analysis
Alterations Process of the Company’s Constitution
As per the employment contract of Amaya and the Oh My Pty Ltd Company, Amaya has
accepted the position of an accountant with 10% shares of the company to her name. However,
on the 1st of July 2018, Huw and Sammy found out that Amaya accepted the accounting position
in one of competing company of Oh My Pty Ltd Company i.e. Gosh Pty Ltd Company. This
decision of Amaya has further breached her employment contract with Oh My Pty Ltd Company,
1MIPA, ‘Decree promulgating the law on business organizations’ (2011) Official Gazette of the Republic of
Montenegro 06/02 1-72
2 DOE, ‘Business law and ethics’ (2016) Indiana Department of Education Academic Standards Course Framework
1-5.
3ASIC, REP 37 penalties for corporate wrongdoing (2014) <https://asic.gov.au/regulatory-resources/find-a-
document/reports/rep-387-penalties-for-corporate-wrongdoing/>

3LEGAL REGULATION OF BUSINESS STRUCTURE
which would significantly affect their business. As per the s136(2) of the Corporation Act 2001,
Amaya does not stand in any position to control or have power but instead, Oh My Pty Ltd
Company holds the major power to make judgments. In case of any decision made by the
company or its member on altering the constitution, under the s140(1)(a) Article, both are held
equally responsible on making any decision in altering the constitution. Under this act, the initial
process might start from holding a meeting with every members of the company if any alteration
of constitution is to be made within the business structure. As Oh My Pty Ltd Company will hold
the meeting in the company, members of these meeting have to undergo through the process of
voting system as per the s136(2) Corporation Act.
Majority of the votes can help in determining the result whether alteration of the
constitution will be done or not. Here, the decision of alteration is directly dependent upon 75%
votes of the majority members. However, in case if the majority of the votes does not reach up to
75%, then the decision on alteration will be dismissed as per the s136(2)Corporation Act 2001.
In some cases, if the majority decision is not identifiable or cannot be decided, then the 75%
votes is assumed to be considerable on the alteration decision as per the business act of the
company. Other than this, the Corporation Act 2001 also projects that the alteration of
constitution can only be initiated if it is valid. An alteration is valid only if it benefits Oh My Pty
Ltd Company but not if it affects or harms them or their business4. It is further evident that
Amaya has the least chance of altering the constitution of Oh My Pty Ltd Company, as the
majority of the member’s vote is the only way for her on altering the constitution for retaining
her 10% shares from the company5.
Inclusion of the Clause and Shares
The case of PJC v CAMAC, implies that the directors of the companies are given the
power on the basis of which they can alter company’s clause only when the purpose is meant to
benefit the organization or its stakeholders6. Based on the case of Gambotto v WCP Ltd, it is
further displayed that the Australian High Court rejected the bona fide that was benefitting the
WCP Company, as Gambotto had his own property rights as per the same. Since, Gambotto had
4 WIPO, ‘Corporations Act 2001’ (2013) Office of Parliamentary Counsel 1-679.
5 AZEDOC, ‘Module 3C – Alteration of company constitution’ ({2008}) LWB334 – Riedel Notes.
6Justice Geoffrey Nettle, ‘The Changing position and duties of company directors’ (2018) 41 Melbourne University
Law Review (Advance) 3, 1-31.

4LEGAL REGULATION OF BUSINESS STRUCTURE
not committed or caused any impact in the WCP’s loss. Thus, owing to this reason, the
Australian High Court favored the decision towards Gambotto7. Similarly, in the case of
Sidebottom v Kershaw, Leese & Co, it is also observed that Sidebottom had created an impact on
the company by leaving and joining the other competing companies. His request in attaining
shares from the company was further rejected8. Based on the principle of share capital, the case
of Amaya is similar to that of the case of Sidebottom v Kershaw, Leese & Co. Thus, in this
context, it is observed that Amaya has created an impact on Oh My Pty Ltd Company by
deciding to work in the competing company at an instant without letting the directors or anyone
of the members to know about it. If the decisions made by Amaya had not created an impact in
the company, then her chance of acquiring shares through alteration would have been possible.
Recourse of Non-Payment on One Year Contract
Based on the Corporation Act 2001, every shareholder has the right to receive their
shares at any given condition. However, in case of any action or decision taken by the
shareholder is against the company, then it is less possible for them to receive shares as per the
agreement conditions stated within the shareholder’s rights. This scenario can directly be viewed
in the case of Burland v Earle [1902] AC 83, where the elementary principle was considered in
the joint stock company. As the major problem was amid the internal management belonging to
the company and its shareholders, the Court was not able to take any action as per the elementary
principle. Contextually, this principle led the company to hold power to make any decision about
whether Burland would be provided with his or not. As per this case, “It is clear law that in
order to redress a wrong done to the company or to recover moneys or damages alleged to be
due to the company, the action should prima facie be brought by the company itself’ (p. 1)9. As
Gracey had signed a one year contract with Oh My Pty Ltd Company and started working but
getting involved with Amaya with respect to working in the competing business company i.e.
Gosh Pty Ltd, Gracey has less chance of recourse of receiving her non-payments. This indicates
7Rachel Leow, ‘Minority protection doctrines: from company law and equity to strata title’ (2010) Faculty of Law
860-876.
8Vanessa Mitchell, ‘The high court and minority shareholders’ (21195) 7Bond Law Reviewi 2 59-64.
9Alastair Hudson, BHS and the reform of company law (2016)
<https://strathprints.strath.ac.uk/63017/1/Hudson_CL_2016_BHS_and_the_reform_of_corporate_law.pdf>

5LEGAL REGULATION OF BUSINESS STRUCTURE
that whether she will receive any non-payment figures or not directly largely depends upon the
decision of Oh My Pty Ltd Company and not any other party or governing body10.
The Sec. 320 of the Corporation Act 2011 states that any shareholder, who seeks their
recourse of non-payments must be judged as well as addressed well prior to taking any decision
on the issuing the non-payments from the company. Similarly, another case based on the
principle of non-payment dividends under the Corporation Act 2001 is identified as Sanford v
Sanford Courier Service Pty Ltd (1986) 5 ACLC 394. In this particular case, it was observed that
Mr. Sanford was not treated or judged in the right way by the company, as they did not follow
the this section under the Corporation Act 2011. This injustice by the company projects an
oppressive behavior to Mr. Sanford, as he did not receive his non-payments by the company11.
Focusing on this scenario, it can be assumed that Gracey is in a similar position, as she is looking
for the option of recourse for her non-payment to be provided by Oh My Pty Ltd Company.
Thus, on the basis of this respective section, Oh My Pty Ltd Company holds a power to decide
whether she must be paid with her non-payments or not. Even though Gracy has less chance of
receiving the mentioned non-payments, she needs to make sure that Oh My Pty Ltd Company is
following the Corporation Act 2011 as well as its Relief Section of Article 320. If the company
does not follow the legal regulations, then Gracey has a greater chance of suing the directors of
the company and can also have her recourse of non-payments as well12;13:14.
Question 2 Analysis
Equivalent Duties and Penalties of the Directors
Implementing the principle of the agency in relation and breach of duty by the director as
per the Part 2D.1 Section of Corporation Act, it can be assumed that Kristofer has breached this
Act by selling the shares of 5% by himself without confirming or informing Aida and Jade, who
are the two directors of the Drink It Up Pty Ltd. Most importantly, as per the principle, a major
10Alastair Hudson, BHS and the reform of company law (2016)
<https://strathprints.strath.ac.uk/63017/1/Hudson_CL_2016_BHS_and_the_reform_of_corporate_law.pdf>
11Wolters Kluwer, Sanford v. Sanford Courier Service Pty. Ltd. & Ors., Supreme court of New South Wales, 28 May
1986 (2018) <https://iknow.cch.com.au/document/atagUio386326sl10537800/sanford-v-sanford-courier-service-
pty-ltd-ors-supreme-court-of-new-south-wales-28-may-1986>
12Zain Sharar, Minority shareholders' remedies In public shareholding companies: comparing the state of Qatar and
Australia (2010) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2996909>
13Aherns Lawyers, Statutory oppression remedy under the corporations act 2001 (cth) (2017)
<http://www.ahernslawyers.com.au/latest-news/statutory-oppression-remedy-under-the-corporations-act-2001-cth/>
14Adrian Coorey, Australian journal of competition and consumer law update: Vol 26 Pt 1 (2010) <
http://sites.thomsonreuters.com.au/journals/tag/adrian-coorey/>

6LEGAL REGULATION OF BUSINESS STRUCTURE
reason is that the action of Kristofer stands against the Drink It Up Pty Ltd Company, which can
further create problems for the company15. The Corporations Act s198A further portrays that the
director’s duty is to protect, manage and direct the company. Even though they are entitled to
have some powers or rights, thus they need to ensure that any action or decision taken on behalf
of the company must not breach the regulations stated in the Corporations Act s198A. This Act
also states that every actions and decision taken by them must be in favor of the company and
not against it. This Corporations Act s198A also highlights that breaching of this act by a director
from a group of three directors indicates serving their own individual need rather than the
company or the other directors of the company16. This scenario of breaching the Corporation Act
2001 is exactly similar to scenario of Kristofer’s action and decision taken on his behalf rather
than the company’s behalf. Implementing the Section of 229(2) of the Corporation Act 2001, it is
clearly evident that the Kristofer has misused his power as a director by selling his 5% shares,
which further affects the company.
Applying the principle of Section of 229(2) of the Corporation Act 2001, Kristofer will
be facing a criminal penalty, where he has to pay the amount of AUD $5,000 (Australian Dollar),
as he has misused his power as a director. If he had taken any actions, which were associated
with fraudulency, then, the penalty of this act would result to an amount of AUD $20,000 or
maybe an imprisonment of five years. The high court of Australia will make an order whether
Kristofer has to pay the amount of AUD $20,000 to the corporation or not17. As per the rules
Sections 134-141 under the Corporation Act and 198E, there are various rules, which are based
on the company’s internal management such as making decision on agreement or not by
conducting meetings among the company members. In the context of changing the decisions or
rules of the internal management, the company will require a constitution on doing so18.
Similarly, with respect to the particular case, of Twycross v. Grant and Others, it is identifiable
through the section 38 of the Companies Act that the directors of the joint stock companies had
sold their shares to other companies but with a motive of promoting their company, which is
15Thomson Reuters, ‘Chapter 2d – Officers and employees’ (2015) Division 1 – General Duties 211-226.
16Silberstein & Associates, ‘Business guide series: Directors duties in Australia’ (2017) Silberstein & Associates:
Business Guide Series 1-4.
17Justice Geoffrey Nettle, ‘The Changing position and duties of company directors’ (2018) 41 Melbourne University
Law Review (Advance) 3, 1-31.
18Australian Government, ‘Corporations Act 2001’ Federal register of legislation (2018)
<https://www.legislation.gov.au/Details/C2017C00129>

7LEGAL REGULATION OF BUSINESS STRUCTURE
considered to be legal and positive for the company. In these cases, no penalties were charged for
the directors, as they acted as a promoter. Kristofer selling his shares without following and
considering the legal requirements such as Corporation Act 2001, have further affected the
company rather than promoting its services. This action of Kristofer will further lead him to pay
the penalty of AUD $5,000 to AUD $20,000 as per the decision taken by the Australian High
Court19.
Considering s 181 of the Corporations Law, a director must discharge their respective
duties considering the provisions of good faith for the betterment of the organizations. Its
subsection 181(1) is related to civil penalties20. This implies that Kristofer, a director of Drink It
Up Pty Ltd has the duty to provide good faith for the best interest of the organization in which he
is working. However, he has breached the contract and hence is liable for its consequences.
Hence, it can be said that the directors owe their duties to their corporations. Moreover, applying
the law principles, if Kristofer breached the contract intentionally, it can be termed as criminal
offence under section 184(1) and may be penalized accordingly.
Possible Remedies for Directors
As per the principles and regulation under the Part 2D.1 Section of Corporation Act,
Kristofer being one of the directors of Drink It Up Pty Ltd have breached the contract. Hence, it
can be stated that based on this Act, the company and the corporate regulations as well as
legislation has been breached by him. This action led him to be liable for receiving a penalty,
which further depends on the decision made by the Australian High Court. Based on the
Practical effect of s140(1)(c) of Corporation Act, which follows the principle of enforcement
between the members, Kristofer has an appropriate remedy. However, this is only possible if the
breach is made in terms of the company’s constitution. In case of breaching of Corporate Act
2001, it is not possible for Kristofer to apply for remedy.. As Kristofer has breached the
company’s constitution, the possible remedies would be receiving the consent of 5% shares sold
from Dhruv. Another remedy can be appointing directors for Drink It Up Pty Ltd. A resolution
can be formed under certain conditions made by Aida and Jaden, which are the other directors of
19UNISET, ‘Twycross V. Grant and others’ (2012) <http://www.uniset.ca/other/cs3/2CPD469.html>
20 John Kluver, Sections 181 and 189 of the Corporations Law and Directors of Corporate Group Companies (2000)
<https://law.unimelb.edu.au/__data/assets/pdf_file/0018/1710153/130-kluver1.pdf>

8LEGAL REGULATION OF BUSINESS STRUCTURE
the company. The case of Dungowan Manly Pty Ltd v McLaughlin can be cited as an example of
the remedies, where McLaughlin was provide remedies even after breaching company’s
constitution. McLauglin as a director of the company was further settled with dismissal of
several rights and power from the post of director. Similarly, Kristofer can also have remedy but
several rights may be withdrawn from his position of director21.
Action against Kristofer on Breaching
Practical effect of s140(1)(c) Article under the Corporation Act 2001, projects an
understanding, where an internal members or member of the same company have right to enforce
or take an action against the other members within the organization. This directly depends on the
circumstances such as conditions stated in making a purchase of the shares from the other
members. Focusing on the agency principle of indoor management rule, the rule in Turquand’s
case 2 portrays that similar actions were taken without any confirmation or any contact with the
members of the company. This unethical practice by the company did not consider its regulations
and legislations such as Corporation Act 2001, created a chance for the other members to take
certain actions. With respect to the belonging of the company, the member possessed power of
taking action with respect to the company with the presence of any sort of forums as per the
s133(1) Corporation Act 200122. Similarly, Dhruv has taken action against Kristofer, who is the
director of a Drink It Up Pty Ltd Company, as he had sold him his overall shares of 5% from the
company. Taking action would be possible but Dhruv needs to ensure that he follows rules as
well as the regulations by abiding the Corporation Act 2001 as well as collect forums in order to
be permitted for taking any actions against Kristofer and Drink It Up Pty Ltd Company.
Conclusion
Based on the Corporation Act 2001and 2011 along with its various article elements, it
can be inferred that any actions taken on behalf of the corporation or in behalf of the individual
members, must meet every legal laws and set of national rules. Doing this will not only ensure
the action to be legal but it would also assist the individuals or the company from facing any
business consequences, which can be highly risky for its operations. These laws, thus act as an
21David Ferguson, Australia: The statutory contract (2013)
<http://www.mondaq.com/australia/x/221404/Contract+Law/The+Statutory+Contract>
22Werksman Attorneys, ‘Pocket guide to business rescue’ (2013) The Corporate & Commercial Law Firm 4-51.

9LEGAL REGULATION OF BUSINESS STRUCTURE
identity of the companies and serves as an existing lifeline to them for overcoming any serious
business or financial issues.

10LEGAL REGULATION OF BUSINESS STRUCTURE
References
Adrian Coorey, Australian journal of competition and consumer law update: Vol 26 Pt 1 (2010)
< http://sites.thomsonreuters.com.au/journals/tag/adrian-coorey/>
Aherns Lawyers, Statutory oppression remedy under the corporations act 2001 (cth) (2017)
<http://www.ahernslawyers.com.au/latest-news/statutory-oppression-remedy-under-the-
corporations-act-2001-cth/>
Alastair Hudson, BHS and the reform of company law (2016)
<https://strathprints.strath.ac.uk/63017/1/Hudson_CL_2016_BHS_and_the_reform_of_corporate
_law.pdf>
ASIC, REP 37 penalties for corporate wrongdoing (2014) <https://asic.gov.au/regulatory-
resources/find-a-document/reports/rep-387-penalties-for-corporate-wrongdoing/>
Australian Government, ‘Corporations Act 2001’ Federal register of legislation (2018)
<https://www.legislation.gov.au/Details/C2017C00129>
AZEDOC, ‘Module 3C – Alteration of company constitution’ ({2008}) LWB334 – Riedel Notes.
David Ferguson, ‘Australia: The Statutory Contract’ (2013)
<http://www.mondaq.com/australia/x/221404/Contract+Law/The+Statutory+Contract>
DOE, ‘Business law and ethics’ (2016) Indiana Department of Education Academic Standards
Course Framework 1-5.
John Kluver, ‘Sections 181 and 189 of the Corporations Law and Directors of Corporate Group
Companies’ (2000) <https://law.unimelb.edu.au/__data/assets/pdf_file/0018/1710153/130-
kluver1.pdf>
Judith Fox FGIA, ‘Shareholder primacy: is there a need for change?’ (2014) Governance
Institute of Australia Ltd 1-26.
Justice Geoffrey Nettle, ‘The Changing position and duties of company directors’ (2018) 41
Melbourne University Law Review (Advance) 3, 1-31.

11LEGAL REGULATION OF BUSINESS STRUCTURE
MIPA, ‘Decree promulgating the law on business organizations’ (2011) Official Gazette of the
Republic of Montenegro 06/02 1-72.
Rachel Leow, ‘Minority protection doctrines: from company law and equity to strata title’ (2010)
Faculty of Law 860-876.
Silberstein & Associates, ‘Business guide series: Directors duties in Australia’ (2017) Silberstein
& Associates: Business Guide Series 1-4.
Thomson Reuters, ‘Chapter 2d – Officers and employees’ (2015) Division 1 – General Duties
211-226.
UNISET, ‘Twycross V. Grant and others’ (2012)
<http://www.uniset.ca/other/cs3/2CPD469.html>
Vanessa Mitchell, ‘The high court and minority shareholders’ (21195) 7Bond Law Reviewi 2 59-
64.
Werksman Attorneys, ‘Pocket guide to business rescue’ (2013) The Corporate & Commercial
Law Firm 4-51.
WIPO, ‘Corporations Act 2001’ (2013) Office of Parliamentary Counsel 1-679.
Wolters Kluwer, Sanford v. Sanford Courier Service Pty. Ltd. & Ors., Supreme court of New
South Wales, 28 May 1986 (2018)
<https://iknow.cch.com.au/document/atagUio386326sl10537800/sanford-v-sanford-courier-
service-pty-ltd-ors-supreme-court-of-new-south-wales-28-may-1986>
Zain Sharar, Minority shareholders' remedies In public shareholding companies: comparing the
state of Qatar and Australia (2010) <https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=2996909>