Legal Regulations and Business Structure

This study material discusses legal regulations and business structure in detail. It covers topics such as alteration of constitution, contracts formed before registering the company, and director's duties. The material provides advice to individuals in different scenarios and cites relevant cases to support the arguments. The subject is not specified, but it is relevant to business law. The course code and college/university are not mentioned.

Running head: LEGAL REGULATIONS AND BUSINESS STRUCTURE
Legal Regulations and Business Structure
Name of the Student
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Table of Contents
Question 1A.....................................................................................................................................2
Alteration of the constitution of a company as per the Corporations Act...................................2
Advise to Salman.........................................................................................................................3
Question 1B.....................................................................................................................................4
Contracts formed before registering the company.......................................................................4
Advice to Melanie........................................................................................................................5
Question 2A.....................................................................................................................................7
Director’s duties and its provision under the Corporation Act....................................................7
Advise to Archibald.....................................................................................................................8
Question 2B.....................................................................................................................................9
Director’s duty to disclose intricate details to individual shareholders.......................................9
Advice to Faizah..........................................................................................................................9

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Question 1A
Alteration of the constitution of a company as per the Corporations Act
The provisions for the incorporation of a constitution of a company is laid down under
the Corporations Act 2001 (Cth)1. Along with incorporation, it also provides the provisions to
add and alter the constitution the corporation as well. The members are tied together by the
constitution of the company, which also binds them regarding their dealings with their clients
and third parties. Section 136 of the Corporations Act (CA) states the provision to add or alter the
constitution of a corporation2. While, section 136(2) of CA lays down the rules to pass a special
resolution for changing the constitution of a company3. However, such changes made in the
constitution will not have an effect unless the regulations laid down under section 136(3) are
complied with4. It is to be noted that under section 136(4), a company has the power to change
its constitution unless otherwise mentioned5.
In the given case study, Kody and Ryder, holding 45% of shares each (total 90%, which
make them the major shareholder) changed the constitution of the company, as they
comprehended that Salman has been indulging in a competitor company and influencing Melanie
to supply her work to that competitor company. Sensing the threat to their company, the directors
(Kody and Ryder) passed a resolution, changed Astounding Gift’s constitution and added the
clause of ‘buy back shareholdings’ of less than 12% from the minority shareholders at their
discretion.
In Gambotto v WCP Limited6, it was observed that buying back shares of the minority
shareholders by the ones holding the major portion of shares for changing the constitution of the
company was not permissible. The court held that it was unjust and ‘oppressive’ to buy back
shares of the minority shareholders as they already hold a miniscule amount of shares, therefore
buying back their shares would leave them with nothing. It was not granted by the court at the
point, unless the majority shareholders could support their claim with some special purpose. It
1 Corporations Act 2001 (2018) Legislation.gov.au <https://www.legislation.gov.au/Details/C2017C00328>.
2 Corporation Act 2001 (Cth) s 136
3 Corporation Act 2001 (Cth) s 136(2)
4 Corporation Act 2001 (Cth) s 136(3)
5 Corporation Act 2001 (Cth) s 136(4)
6 [1995] 182 CLR 432

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was held that buying back shares would only be permitted if it were proved that such buying
back of shareholdings would save the company from material injury, monetary or otherwise. The
plaintiff needed to prove that the minority shareholder would be making use of the company
shares for personal interest or gain to make the court grant the permission to change the
constitution.
Advise to Salman
A special resolution is the essential requisite to change the constitution of the company
and such alteration needs 75% of the shareholders to vote in order to ratify such change, as per
section 136 of the Corporations Act 2001 (Cth). In this case, Kody and Ryder held 90% of the
total shares that judiciously allow them to pass a resolution to change the company’s constitution
and add the clause of buyback minority shares, as stated by the section 136(2) of the CA 2001. In
addition to, Salman held only 10% of the total shareholding, which proved to be an advantage for
the majority shareholders to amend the constitution to insert the clause for buying back shares, as
section 136 (3) and 136 (4) states the provision for this matter7. Therefore, the action of Kody
and Ryder to change the constitution of the company cannot be questioned and it is just and
proper as per the provisions of the Corporations Act 2001. They can clearly prove that their
action was bona fide and for the benefit of the corporation, like it was stated in Lindley MR in
Allen v Gold Reefs of West Africa.8
Even though the provisions of the Act allow the majority shareholders to pass a special
resolution excluding the minority shareholders who hold less than 11% shares. Nonetheless, the
court is always in the favour of looking into the matter whether the minority shareholders are
being oppressed with the decision of the directors or majority shareholders. It is vital for the
directors to prove that the intention behind changing the constitution not for oppressing the
minorities, but for the best interest of the company. Therefore, the intention and purpose for the
alteration of constitution is important. In the given case, Salman was secretively working with
Incredible Gifts Pty Ltd, a competitor company and inducing Melanie to sell her work to that
competitor company, which is completely unethical and harmful for Astounding Gifts Pty Ltd.
7 Corporations Act 2001 (2018) Legislation.gov.au <https://www.legislation.gov.au/Details/C2017C00328>.
8 [1900] 1 Ch 656 at 671

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Therefore, the principle held in the Gambotto case cannot be adhered to in this matter. Changing
the constitution to stop Salman from exploiting the company is reasonable. Therefore, Salman
has no claim against Astounding Gifts Pty Ltd or to its directors. He cannot sue the company as
well. While, the company can sue Salman for dealing with a competitor company secretively
being an employee of Astounding Gifts Pty Ltd.
Question 1B
Contracts formed before registering the company
Contracts that are signed before the company comes into existence is subject to the
provisions laid down under section 131 of the Corporations Act 2001 (Cth)9. It is a mandate to
abide by the provisions of such contract and perform it, although it was entered upon before
registering the company. The parties are therefore, entitled to do the needful to execute the
contract as well as enjoy the benefits or profits coming out of such contract as per section 131 (1)
CA10. However, a ratification of such contracts entered before registration of the company is
required within a specified time agreed by the parties or within a reasonable time after the
company is incorporated and registered11. The other party to the contract would be liable to
compensate the company to such pre-registration contracts if it has failed to ratify the contracts
with the specified period agreed by the parties or within the time, which is reasonable enough
after such company has come into existence as mentioned in section 131 (2)12. The party who
needs to pay the compensation to another would equal the amount that the company was
supposed to pay if the contract was ratified. Section 131 (3) states that if the court is convinced
that the company is not ratifying the contract even after the reasonable time has lapsed after
registration, then it shall direct the party to pay the whole compensation amount to the company
or in parts; it might also rescind the contract and direct the parties to return the products
received13.
9 Corporation Act 2001 (Cth) s 131
10 Corporation Act 2001 (Cth) s 131(1)
11 Ortiz, Rafael Illescas. "Pre-contractual Liability in the Civil Law." 2016. International Sales Law. Nomos
Verlagsgesellschaft mbH & Co. KG.
12 Corporation Act 2001 (Cth) s 131(2)
13 Corporation Act 2001 (Cth) s 131(3), s 131(4)

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Advice to Melanie
Melanie violated her exclusive contract of supplying her crafts with Astounding Gifts Pty
Ltd as she stopped supplying her work to them and instead, supplied to Incredible Gifts Pty Ltd,
a competitor company. However, the contract was signed when the company was named as
Incredible Gifts Pty Ltd, which was changed to Astounding Gifts Pty Ltd later on while
registering it officially. Ryder agreed with Melanie to pay her $5000 per month in exchange of
her crafts. Astounding Gifts Pty Ltd was therefore liable to execute the contract with Melanie,
which it did not. In addition to, it did not ratify the agreement as well after the company got itself
registered. Thus, the company violated the provisions laid down under section 131 of CA 2001.
In the given case, Ryder will be liable to compensate Melanie as he had entered into the
contract with her when the company was not registered and since then Ryder or the company did
not ratify the contract within a specified or reasonable time. Melanie can claim the remaining
payment of her remuneration from Astounding Gifts Pty Ltd wholly at one time or in parts. She
can sue the company in case of non-payment of her remuneration.

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Bibliography
Corporations Act 2001 (2018) Legislation.gov.au
<https://www.legislation.gov.au/Details/C2017C00328>
Gambotto v WCP Ltd [1995] 182 CLR 432
Lindley MR in Allen v Gold Reefs of West Africa [1900] 1 Ch 656 at 671
Ortiz, Rafael Illescas. "Pre-contractual Liability in the Civil Law." 2016. International Sales
Law. Nomos Verlagsgesellschaft mbH & Co. KG.

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Question 2A
Director’s duties and its provision under the Corporation Act
Directors are endowed with several duties under the common law. In addition to, they are vested
with many vital duties under the Corporations Act 2001 (Cth) which are differentiated as general
and statutory duties. They are meant to execute their duties given to them and carry them out in
good faith according to the common law and the statutory laws, for the best interest of the
corporation14. The provisions of the Corporation Act is, however, a reflection of the rules and
principles of common law. Section 181 of the Corporations Act 2001 (Cth) lays down the
director’s and other officers duties, which they are supposed to execute15. They are liable to
exercise them in good faith and intention. Their objective as a director should be to carry out
their duties for the best interest and betterment of the corporation, as per Section 181 (1) of the
CA16. Failure to carry out the duties and responsibilities laid down in the statute would attract
civil penalty under Section 1317E of the CA17.
In ASIC v Rich, the plaintiff pointed out that the defendant had infringed section 180 (1)
of the Corporation Act that clearly specifies the duties of the director to take reasonable care and
execute their duties with diligence while exercising and discharging their powers and duties18.
This case talks about the business judgment rule that the statute lays down under section 180 of
CA. It says that the directors may take decision based on the circumstances and for that they
have the discretion to contravene certain duties for the interest of the company. Similarly, in
ASIC v Adler, the directors breached several of the duties prescribed under the Corporation Act19.
The court proclaimed that the defendant had breached section 180 that asks a director to act with
reasonable care, section 181, which requires the director to carry out their reesponsibilities in
good faith and section 182 lays down the provisions against misusing the position of the director.
There were violations of section 183 and 206A as well, the former discuss about the director’s
duty not to misuse the information obtained by the virtue of his position while the latter talks
about the duties of the director regarding financial responsibilities and assistance. The Australian
14 Corporations Act 2001 (2018) Legislation.gov.au <https://www.legislation.gov.au/Details/C2017C00328>.
15 Corporation Act 2001 (Cth) s 181
16 Corporation Act 2001 (Cth) s 181(1)
17 Corporation Act 2001 (Cth) s 1317E
18 [2009] 75 ACSR 1, 637 [7295]
19 [2002] NSWSC 171

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Metropolitan Life Assurance Co Ltd v Ure case observed that the directors should utilize their
power of discretionary for refusing the transfer of shares for valid reasons, like disallowing
membership to an insolvent person, refusing a disputed member or shareholder to hold his
position, and so on20. In the case of Vrisakis v Australian Securities and Investments
Commission, it was held by the court that if a director participates in a conduct that might harm
the best interest of the company, it would not be sufficient to prove that he failed to execute his
duties with care and diligence21. The judges held that the whether the director has breached his
duties can only be determined by ‘balancing’ the foreseeable or probable risk of injury against a
potential profit or gain that can affect the company from such conduct of the director.
Advise to Archibald
In this matter, Chip-Eze Pty Ltd suffered a substantial loss in their potato crisps and
snacks business while it made good profit in their frozen potato chips manufacturing business.
This paved the way for forming a brand new company for only producing frozen potato chips,
wrapping up their potato crisps and snacks unit. They combined their assets of Chip-Eze Pty Ltd,
formed a new company and named it Freeze Me Pty Ltd. They had many creditors due to the
losses sustained from their previous business, so this new company would help them regain their
position in the market. It is evident that they tried to evade the credits and liabilities incurred out
of the previous business of potato crisps and snacks. As held in Bell Group Ltd v Westpac
Banking Corporation, the directors must act bona fide for the interest of the company as the
investors takes up monetary risks to provide financial support to the corporations22. Therefore, to
evade liabilities and credits suffered from the loss of business and opening a new business for the
matter would not spare the directors from executing their responsibilities. They cannot argue
before the court that they did it for the best interest of the company, as making another suffer
cannot be considered ethical and reasonable to save one’s own company. It is a wrong on the
director’s part to evade creditors and therefore they are to be charged under section 1317E of the
CA23. Thus, Archibald is advised to look into all these details of the misconduct of the directors
and penalize them under the above-mentioned provision, which involves a penalty up to
20 [1923] 33 CLR 199
21 [1993] 9 WAR 395
22 (No 9) [2008] WASC 239
23 Corporation Act 2001 (Cth) s 1317E

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$200000. On the other hand, Archibald can take a bolder step by cancelling their directorship
under section 206C of CA24.
Question 2B
Director’s duty to disclose intricate details to individual shareholders
In Percival v. Wright, it was observed that the directors cannot be made liable to execute
duty towards an individual shareholder25. The directors are only vested with duties towards the
corporation and not toward an individual shareholder. It was also held that a director has the
liberty to buy shares from a shareholder who wish to sell his part, before the company was
wound up. It was ordered by the court that such a conduct does not speak about the infringement
of the director’s duties as they do not work for the interest of an individual shareholder but for
the benefit of the corporation. However, the decision observed in the Percival v. Wright was not
maintained in the Coleman v Myer case as in this case the court ordered that the directors do hold
certain duties towards the individual shareholders26. It was proclaimed by the court that the
directors possess certain fiduciary duties to the individual shareholders. It was stated that the
director are meant to discuss any material fact or foreseeable decision about the corporation with
such individual shareholders. It solely depends on the factor that such individual shareholder
have put trust upon the director to disclose the facts pertaining to his portion of shares in the
company.
Section 588G of the Corporations Act 2001 (Cth) lays down that the director should not
carry out insolvent trading, as it would attract him penalty for the losses incurred by an
investor27.
Advice to Faizah
For the given matter, it is to be determined first whether Jordon had a duty toward Faizah
who is an individual shareholder, only then can it be determined whether Jordon breached her
24 Corporation Act 2001 (Cth) s 206C
25 [1902] 2 Ch 401
26 [1977] 2 NZLR 225
27 Corporation Act 2001 (Cth) s 588G

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duties as a director. According to the decision observed in Percival v Wright, the director has no
duty toward the individual shareholder who wished to sell off his shares, irrespective of the fact
that she did not know about the liquidation of the company. In the given case, although Faizah
sold off her shares to Jordon, but there is no evidence of the fact that she had put her trust on
Jordon for an emergency. Thus, the exception to the rule as per the Coleman v Myers is not
maintainable in this matter. Jordon had no liability to disclose any material fact about the
winding up of the company to Faizah. Therefore, Faizah cannot bring up an action against
Jordon for not disclosing the fact about the liquidation of the corporation before buying her
shares.

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Bibliography
ASIC v Adler [2002] NSWSC 171
Australian Securities and Investments Commission v Rich [2009] 75 ACSR 1, 637 [7295]
Australian Metropolitan Life Assurance Co Ltd v Ure [1923] 33 CLR 199
Coleman v Myers [1977] 2 NZLR 225
Corporations Act 2001 (2018) Legislation.gov.au
<https://www.legislation.gov.au/Details/C2017C00328>
Percival v Wright [1902] 2 Ch 401
Vrisakis v Australian Securities and Investments Commission [1993] 9 WAR 395