ACC520 Legal Regulations of Business Structures: Case Analysis

This case study delves into two primary legal issues concerning business structures. The first issue examines changes to a company's constitution, focusing on a minority shareholder's ability to prevent alterations that expropriate shares, particularly in light of potential conflicts of interest. It analyzes relevant sections of the Corporations Act 2001 and case law, such as Gambotto v WCP Ltd, to determine the validity of such alterations. The second issue addresses the enforceability of pre-registration contracts, specifically whether a contract made before a company's registration can be enforced if the company later ratifies it under a different name, referencing section 131 of the Corporations Act 2001 and cases like Kelner v Baxter. Additionally, the case study explores potential breaches of director duties under section 181 of the Act, examining whether directors acted in good faith and in the best interests of the company when transferring profitable business segments to a new entity, potentially to the detriment of existing creditors. The analysis considers the consequences of such breaches and the legal recourse available to stakeholders.

ACC520 LEGAL REGULATIONS OF BUSINESS STRUCTURE
Semester 2, 2018
Assessment Task 2
Name: Aliza Giri
Student I.D: 1100457
Course: Legal Regulations of Business Structures
Professor: Tony Tony

Solution 1
Introduction: Changes in the constitution; ability of the minor to keep a check on the changes and
contractual powers of the company
Kody and Ryder completed their graduation from USC. They want to carry on business of
exceptional handmade gifts and craft which they can sell online with the name Incredible Gifts
Pty Ltd.
Now, there are series of transactions that took place which has resulted in raising two prime
issues.
I. To make Salman aware of the procedure that is adopted by any company to bring
changes to its constitution and can Salman has the power to prevent the company to
incorporate a clause in the constitution that allow the directors to expropriate the
shares of Salman.
In Australia, there is no one single form in which a business can be initiated. The numerous
manners in which any interested party can carry on the business of his or her choice such as a
sole trader or as a partnership firm or as a company.
No comoany in Australia comes into existence of its own. There is a set procedure which is laid
down by Australian Securities and Investment Commission (ASIC) and the Corportaion Act
2001 which must be comply with to bring any comoany into existnece. As per section 124 of the
Act, any comoany upon its incorporation is consideed to be a separte legal entiuty in law. In
Salomon v A Salomon and Co Ltd1 and Lee v Lee’s Air Farming2, the court held that when a
company is registered then it is an artificial person and has its own inherent powers to act like a
normal person, that is, to make contract, to sue, to hold properties and is analyzed in Macaura v
Northern Assurance Co Ltd3, etc.4
Now, since a company is an artificial person then the rules upon which a company runs can
either be decided on its own in the form of constitution or it can run through the provisions
mentioned under the 2001 Act as replaceable rules or by both.
1 Salomon v A Salomon and Co Ltd (1897).
2 Lee v Lee’s Air Farming [1961] AC 12.
3 Macaura v Northern Assurance Co Ltd (1925) AC 619.
4 Peter Gillies, Business Law, Federation Press, 2004.

Now, while the comoany is carrying on its objectives, there are times, when the comoany feels
the need to bring changes in the constitution. The shareholdesr are granted power under section
136 of the Act according to which changes can be bought in the constitution (it can be modified,
repealed, etc) provided a special resolution is passed by the shareholders in a specail meeting
with 75% of the shareholders vote moving in favor of the alteration. The alteration bound all
major and minor shareholders of the comoany irrespective of the fact in whose favor the vote has
been cassted.5
At this point, it is important to note that,
Salman holds 10% shares in the comoany and the rest of the shares are hold by ryder and Kody.
Ryder and Kody wants to bring changes in the constitution and thus by availing their power
under section 136 of the Act, they have aclled a shareholdesr meeting wherein they pass the
resolution with a majoirty of 75% even thirugh Salman has voted agiant the resolution with 10%
votes. The resolution was passed to remove Salman from his solicitors post.
So, the alteration is valid and Salmna has to leave post. But, what if Salman wanst to challenge
the lateration. Does Salman have the power to prevent the company to incorporate a clause in the
constitution that allow the directors to expropriate the shares of Salman.
The basic rule is that any resolution passed by majority is binding on the shareholders of the
common y irrespective of the fact whether they like the amendment or not and is held in
Associated World Investments Pty Ltd v Aristocrat Leisure Ltd6. But, as per section 246B if the
alteration to the constitution is bought in so that variations or cancellation are bought in the class
rights of the shares or to bring changes to certain specific rules of the constitution which is not
allowed or when the alteration allows the expropriate shares of the minority shareholders then in
such cases alterations are not allowed at all. The High Court in Gambotto v WCP Ltd7 submitted
that if the important rights or expropriate shares of the minority shareholders are permitted by
bringing changes in the constitution, then, the same is not permitted and is also held in Shears v
Phosphate Co-op Co of Aust Ltd8 and Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd9.
5 Stephen Bottomley, The Constitutional Corporation: Rethinking Corporate Governance, Routledge, 23-Mar-2016.
6 Associated World Investments Pty Ltd v Aristocrat Leisure Ltd (1998) 16 ACLC 455.
7 Gambotto v WCP Ltd (1995) 182 CLR 432
8 Shears v Phosphate Co-op Co of Aust Ltd (1989) 7 ACLC 812.
9 Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd [2006] QSC 358.

The expropriate shares of the minority shareholders is permitted only when it is just for the
company or when it is for necessary purpose or when competition is created by the minority or
detrimental is caused if minority remains as part of the company, etc.10
At this point it is submitted that,
Salman was acting as a solicitor of the company of Ryder and Kody. But, with letting them
know, Salam also get himself involved with their competitors, Incredible Gifts Pty Ltd, as he
accepted the position of the accountant. Also, Melanie (with whom the company of Kody and
Ryder are dealing) was continuously persuaded by Salman that she should sell his items to the
competitor and not to the business of Kody and Ryder. So, Ryder and Kody were right by using
their power under section 246B of the Act as the acts of Salman are not in the interest of the
company and he is competing with the company.
Now, the next important issue that arises is:
II. Can Melanie sue the company of Kody and Ryder for the payment of her contract?
As per the facts, it was found that Kody and Ryder want to register their company with the name
Incredible Gifts Pty Ltd. but, on the day of registration (2nd May 2018), the name intended by
them was already registered, thus, both Kody and Ryder decided to get their company name
registered as Astounding Gifts Pty Ltd.
But, before the registration of the name Astounding Gifts Pty Ltd, Ryder on 26th April 2018
establish a contract with Melaine wherein Melaine will supply his craft to Incredible Gifts Pty
Ltd (which Ryder and Kody wants to register) at a payment of $5,000 per month.
Now, as already analyzed in Salomon v A Salomon and Co Ltd, that upon incorporation, a
comoany gets the status of an artificial legal person who has the capacity to make contracts with
the outsiders on its own behalf.
But, what is the satus of the contarcts that are made before incorporation?
10 Julie Cassidy, Concise Corporations Law, Federation Press, 2006.

The contracts made before incorporation are pre-registration contracts and as per Kener v
Baxte11, such contarcts have no validty in law and are void. The concept os reteriated in Black v
Smallwood1213
But, section 131 of 2001 Act has given recoignitition to these contarcts and it was held in Aztech
Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Limited14, that if such contarcts are ratfied
by the comaony (upon incorpration) itslef then such contarcts are enforceable. But, section 131 is
applicable to those contracts which are made amid the utsider and the representaive of the
comoany before ist incorporation ansd is held in Commonwealth Bank of Australia vs. Australian
Solar Information Pty Ltd15. A contarct with alredy registered comoany when later changes its
name does npot make such contarct a pre refistration contract with the same comoany with new
name. If ratified, the contarct gets the legal srtatus and if the comaony does not compy with such
contarct then its is braech and is held in Airloom Holdings Pty Ltd v Thales Australia Ltd.
At this point it submitted, that a contarct with Ryder and Melaine on 26th Aporil 2018 is apre
registration contarct on behld of Incredible Gifts Pty Ltd. This contract can have legal effect only
if Incredible Gifts Pty Ltd rectify the contract after its incorporation.
But, Incredible Gifts Pty Ltd was never registered by Kody and Ryder but they register the
company as Astounding Gifts Pty Ltd. this new company has rectified the contract with Melaine
on 12th May 2018. It is submitted that the contract with Melaine was a pre registration contract as
there was no company that was in existence when the contract was made. The company was
made by Kody and Ryder which gave approval to the contract of Melaine and thus as per section
131, enforceability is granted to such contract.
Thus, the contract is enforceable and if Astounding Gifts Pty Ltd does not abide with its
contractual obligations then Melaine can sue Astounding Gifts Pty Ltd for breach.
Solution 2
Introduction: Non compliance of the duties of the directors.
11 Kelner v Baxter (1866) LR 2 CP 174
12 Black v Smallwood (1966)
13 Paul Latimer, Australian Business Law 2012, CCH Australia Limited.
14 Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Limited (2004).
15 Commonwealth Bank of Australia vs. Australian Solar Information Pty Ltd (1987).

A company is established, Chip-Eze Pty Ltd. the directors of the company are Michaela, Jordon
and Marianne. All of them are holding 25% share each. Ayub, Saeed, Donte, Neeve and Faizah
together hold the remaining 25% shares. The business of manufacturing of potato chips was
profitable but the business of frozen potato chips was at loss. The company was not able to pay
its suppliers and creditors.
The directors called a meeting on 1st August 2018 and they decided and passed a resolution in
favor that a new company should be registered (Freeze Me Pty Ltd) and the profitable business
must be sold to the new company. Complying with the resolution, Freeze Me Pty Ltd is
registered on 10th August 2018 and the profitable business was sold to the new company. now,
the creditors dues were not paid and considering the situation of Chip-Eze Pty Ltd, the court
appointed Archibald as the liquidator of the company.
Now, based on the series of transactions that took place has resulted in raising two prime issues
I. Archibald must be advice whether the directors are in violation of section 181 of the
Act or any other related duties. If yes, then what consequences can be faced by them?
In Salomon v A Salomon and Co Ltd (1897) the court held that when a company is registered
then it is an artificial person and has its own powers to act like a normal person, that is, to make
contract, to sue, to hold properties, etc. In Lee v Lee's Air Farming Ltd, the directors and officers
aee considered to be distinct from the comoany and the acts that are carried out by them are in
the companys name only. 16
Since a comoany is an artificial person, thus, it requires officesr to act on the behalf of the
comoany. A comoany director is appointed under section 9 of the Act and includes director and
shadow directors17. the directors are authorsed to act for the comoany undet section 18A of the
Act.
But, every directors is also imposed with duties.
One of the most promising duty that is imposed on the directors is the duty of good faith under
section 181 of the Act.
16 Paul Latimer, n12.
17 Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565 and Standard Chartered Bank of Australia Ltd v Antico
(1995) 18 ACSR 1.

Section 181 of the Act – every officer and director of the comoany is imposed with a duty of
good faith and they must make sure that the acts that are carried out by them should be with
proper purpose18 and in the comoanys best interest and is held in Re Smith & Fawcett Ltd19. The
court determines the compliance of the duty objectively, that is, not what the director thinks
himself rather what the court thinks in the given situation. If the court thinks that the duty of
good faith is violated then section 181 is breached and is held in The Bell Group Ltd v Westpac
Banking Corporation (no 9)20. In ASIC v Adler21 it was held that the court will analyze the
compliance of section 181 of the Act by comparing the acts of the directions with what a normal
prudent man will do in the similar situation. (Ford, Austin and Ramsay 2000)
In Westpac Banking Corp v Bell Group Ltd (No 3)22 it was held that when the interest of the
company is neglected by the director in presence of their own then section 181 of the Act is
breached.
Section 191-195 of the Act also submits that whenever the directors indulge in any act those
results in the prevailing the interest of the directors at the cost of the company interest, then, it is
the duty of the directors that the company interest should prevail.
Also, when the directors are taking activities in order to avoid the payment to the creditors of the
company then such acts are illegal phoenix activity and are breach of the duties of the directors
and are held in Commissioner of Taxation v BHP Billiton Ltd [2011]
Now, the law is applied to the given facts and situation,
It is submitted that Chip-Eze Pty Ltd was carrying on two businesses, one at loss and one at
profit, Chip-Eze Pty Ltd sold its business running at loss to Freeze Me Pty Ltd by passing a
unanimous business. This transfer of business is nothing but the breach of section 181. The
breach is incurred because Chip-Eze Pty Ltd was already facing financial problems and in order
to deceive the creditors a new company was incorporated. This act is nothing but carried in bad
faith and thus section 181 is violated.
Further, the acts of Chip-Eze Pty Ltd are in violation of section 191-195 as the directors of Chip-
Eze Pty Ltd have given preference to their own interest and not to the interest of the company.
Now,
18 Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199.
19 Re Smith & Fawcett Ltd [1942] Ch 304.
20 The Bell Group Ltd v Westpac Banking Corporation (no 9) [2008] WASC 239.
21 ASIC v Adler [2002] NSWSC 171.
22 Westpac Banking Corp v Bell Group Ltd (No 3) [2012] WASCA 157.

The directors are also found to involved in illegal phoenix activity as they deliberately shut down
their business in order to cheat the creditors and thus are liable as held in Commissioner of
Taxation v BHP Billiton Ltd.
Since the directors of Chip-Eze Pty Ltd have violated section 181 and section 191-195 of the Act
thus, they can be imposed with penalty of $200,000. They can also be disqualified from their
post.
Further, Faizah approached Jordon on 6th August and asked that if he could but some more shares
Chip-Eze Pty Ltd. Jordon agreed.
Now, the next important issue that arise are:
II. Can Faizah sue Jordon for breach of duties as Jordon agree to sell the shares just
before the company, Chip-Eze Pty Ltd, went into liquidation?
One of the prime duties that are imposed on the duties of the directors is that every director must
act in such a manner so that they must act with all care and diligence and is enshrined under
section 180 of the Act. The acts of the director must be such so that the proper purpose of the
company and the best interest of the company must be attained and is held in Statewide Tobacco
Services Ltd v Morley23 and AWA Ltd v Daniels24.
But, the duty under section 180 (1) if violated by the director will make him liable. But, a
director can protect him by taking the defense under section 180 (2). The director can prove that
he as acting in good faith with expert knowledge and has all reasonable belief that the acts are in
the best interest of the company, then, the director cannot be held to be acting no in good faith
and in the best interest of the company and is held in Daniels v Anderson25.
Section 182 an section 183 of the Act further submitted that no director must misuse their
position and information and is held in R v Byrnes26.
Also, every company directors owns a duty towards the shareholder of the company and is held
in Coleman v Myers27.
23 Statewide Tobacco Services Ltd v Morley (1990)
24 AWA Ltd v Daniels (1992).
25 Daniels v Anderson (1995).
26 R v Byrnes (1995).
27 Coleman v Myers [1977] 2 NZLR 225

It is now submitted that Jordon was in breach of section 180 of the Act as Jordan sold the shares
to Faizah knowing the fact the company will be getting into liquidation. Thus the acts of Jordan
are not in care and diligence. Also, Jordan misused the information and the position thereby
breaching section 182 and 183 of the Act. Also, Faizah being the shareholder of the company, it
is the responsibility of the Jordan to deal with him adequaty7. By, not comply with care the duty
of violated as held in Coleman v Myers

Reference List
Books/Articles/Journals
Bottomley, Stephen, The Constitutional Corporation: Rethinking Corporate Governance,
Routledge, 23-Mar-2016.
Cassidy, Julie, Concise Corporations Law, Federation Press, 2006.
Gillies, Peter, Business Law, Federation Press, 2004.
Latimer, Paul , Australian Business Law 2012, CCH Australia Limited.
Case Laws
Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Limited (2004).
ASIC v Adler [2002] NSWSC 171.
AWA Ltd v Daniels (1992).
Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199.
Associated World Investments Pty Ltd v Aristocrat Leisure Ltd (1998) 16 ACLC 455.
Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd [2006] QSC 358.
Commonwealth Bank of Australia vs. Australian Solar Information Pty Ltd (1987).
Daniels v Anderson (1995).
Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565 and Standard Chartered Bank
of Australia Ltd v Antico (1995) 18 ACSR 1.
Gambotto v WCP Ltd (1995) 182 CLR 432;
Kelner v Baxter (1866) LR 2 CP 174
Lee v Lee’s Air Farming [1961] AC 12.
Macaura v Northern Assurance Co Ltd (1925) AC 619.
Re Smith & Fawcett Ltd [1942] Ch 304.
R v Byrnes (1995).
Salomon v A Salomon and Co Ltd (1897).
Statewide Tobacco Services Ltd v Morley (1990)
Shears v Phosphate Co-op Co of Aust Ltd (1989) 7 ACLC 812.
The Bell Group Ltd v Westpac Banking Corporation (no 9) [2008] WASC 239.
Westpac Banking Corp v Bell Group Ltd (No 3) [2012] WASCA 157.