LAWS2301 Company Law Assignment: Analyzing Company Management Rules

This case study delves into various aspects of company law, analyzing shareholder rights, director duties, and the application of corporate governance principles. It examines scenarios involving the dismissal of directors, potential liabilities of promoters, and the legality of certain corporate actions. The analysis covers issues such as the validity of general meetings, the alteration of company constitutions, and the transfer of shares. It also addresses the duties of promoters, conflicts of interest, and the rights of minority shareholders, drawing on relevant case law and statutory provisions to provide comprehensive legal advice and assess the potential outcomes of various disputes. Desklib provides a platform to access similar solved assignments and study tools for students.

Company Law 1
Company Law
Student’s Name:
Institutional Affiliation:
Course code:
Date:

Company Law 2
Introduction
According to company law, several regulations have been put in place in relation to
general meetings, the appointment and dismissal of directors, and also the rights of shareholders.
When a company is formed with a constitution or adopts it later on, the clauses listed therein
shall act as its internal management rules. In the absence of a constitution, the Replaceable rules
as indicated under the Corporations Act will be enforced (Asic.gov.au, 2018). In other cases, the
internal rules of a company are made up of the Constitution and some of the Replaceable Rules.
This paper analyses various instances whereby the laws and rules may be applied. It considers
several instances where exceptions and limits are presented to protect the minority shareholders
who tend to have limited powers compared to the majority shareholders.
Advice to Al Gorey
Advising Al and Tipper on their Dismissal
In the current case study, several events have taken place which must first be analyzed
before Al and Tipper can be effectively advised on their dismissals. First, Kelly requested the
Board for an extraordinary general meeting which was refused. Ten days later, she held the
general meeting without notice which was only attended by Bud. At this time, Kelly was a
member because she declined the position of director as she did not want to be involved in
management. However, since Bud attended the meeting, it is evident that the holding of the
general meeting was indeed valid (Hill 2010, p. 347). This is because the Board failed to accept
her request, so she used the fact that there was 50% of votes of requesting members. However,
the fact that the directors were not given notice of 21 clear days makes it an illegal meeting

Company Law 3
(Asx.com.au., 2018). This is especially true considering the fact that one of the agendas of the
meeting involved the removal of a director.
Second, Kelly declared that three resolutions were passed. One, Clause two was deleted
from the company’s constitution. Two, both Al and Tipper were dismissed as directors. Lastly,
Kelly was appointed to the Board of Directors. Generally, before a quorum is reached, there must
be at least two voting members. In the current scenario, Bud did not vote on any of the listed
resolutions. Therefore, it is likely that the resolutions can be held null and void considering the
fact that a quorum was not reached (Leuciuc 2012, p. 279). In addition, the Corporations Act
2001 (Cth) s 203C of the Replaceable Rule allows a Pty company to remove a director by
ordinary resolution of general meeting. Unfortunately, the fact that only two members were
present during the meeting and one did not vote makes the decision inapplicable as there are no
majority votes (Lang 2005, p. 739). Just as is the case in Chew Investment Australia Pty Ltd v
General Corp of Australia Ltd (1988) the decision may be easily dismissed because there was no
poll (Venus 2016, p. 30). Therefore, the approach taken to dismiss Al and Tipper goes against
the internal rules of the Fresh Company. The right channel was not used in making any of the
three decisions.
Advising Al of any Liability he may have incurred
In this scenario, the duties of promoters must be taken into consideration. A promoter is
any individual who has actively participated in the process of forming the company, raising its
capital, and even establishing its business. The duties include no conflict of interest, no secret
profits, and the duty of full disclosure. In the 5th May 2017 contract, it is evident that a breach of
duty was being experienced (Price 2011, p. 23). Fresh entered into a contract with Al to purchase
the business and the land at an overhaul of $700,000. This represents a conflict of interest as Al

Company Law 4
is considered the promoter of the company. He is still part of the company as he knows
everything about it. He helped to develop it and even came up with the idea of incorporation. He
is still the director and chairperson of Fresh according to the Company’s constitution (Edmunds
& Lowry 2003, p. 201). The fact that he also bought it presents a conflict of interest as he will
obviously act in his own interests rather than that of the company. This issue may be likened to
that of Tracy v Mandalay (1953) whereby the stakeholders of a company were also seeking to
purchase it. The promoters have a legal duty to focus on the company’s benefits first before any
other.
Part B: Advice to Kelly
Contract with Officeworks
According to s. 131 of the Corporations Act 2001, when a person enters into a contract on
behalf of the proposed company, the company becomes bound by that contract if it later becomes
registered and ratifies the contract. Under s. 131(2), if the company is not registered, then the
signatory becomes liable for the damages. After a company has become registered, it is
considered a separate legal entity from its members and its controllers. Salomon v Salomon
[1897] note that signing a contract on behalf of an unregistered company is considered very
risky as there is no proof that it is a separate legal entity. Therefore, the person who signed the
contract will be held liable.
In the current situation, Kelly purchased computers on behalf of Fresh Pty Ltd. At this
time, the company had not been incorporated which is why Kelly signed on its behalf. However,
even after its incorporation, no payment was made despite the computers being delivered. This is
proof that the company had ratified the contract. If ratification was not present, then the same

Company Law 5
outcome as Bay v Illawarra Stationery Supplies Pty Ltd (1986) would have been experienced.
Here, the accountant who signed the contract was held liable for the damages. Therefore, it is
clear that there is really no reason for Kelly to worry as the company has already been registered,
and has still failed to meet the requirements of the signed contracts. Officeworks, therefore, will
not be able to sue her as there are no legal grounds. Had the company not been incorporated yet,
Kelly would have been held liable for the contract she had signed. Fortunately, through
incorporation, Fresh Pty Ltd. is now a separate legal entity which can be sued.
Legality of Tipper’s Dismissal as Consultant
This scenario involves altering the constitution of the company which indicates that
Tipper shall be employed as a Farm Consultant until 2025. An existing constitution may only be
altered through a special resolution passed by the general meeting as stipulated under the
Corporations Act 2001 (Cth) ss. 135(2) and 136(2). The general meeting can only pass a
resolution once a majority of votes support the action (LegalVision, 2018). In this case, Bud
voted against the resolution which Kelly went ahead to pass irrespective of the views of the other
member (Adams & Ferreira 2008, p. 60). Here, Kelly is liable for the fact that she went against
the constitution’s third clause and fired Tipper. The right approach would have been to hold a
vote to alter the constitution so that Tipper would have to be dismissed even before 2025.
Although she passed a resolution even though the other present member at the general meeting
voted against it, she had a right to do so as she is the majority shareholder. This fact weakens the
case against her as a she has several benefits associated with being a majority shareholder. She
can claim that votes were cast by means of a poll whereby her shares would have given her more
votes, meaning that she had the majority votes just as was the case in Re Pembury Pty Ltd
(1991). Therefore, if Tipper sues for compensation, it is highly likely that she will be

Company Law 6
compensated owing to the fact that Kelly went against the constitution of the company without
following the right channel.
Transfer of Bud’s Share to Jennifer
In every company, a share is considered a personal property that can be transferred or
transmitted from one person to the next. For it to be transferred, the shareholder may decide to
sell it or gift it to someone else. On the other hand, transmission occurs as a result of death,
bankruptcy or mental incapacity. Generally, the company has a duty to make a decision within 2
months. The directors of a company can refuse to have shares transferred if they have not been
fully paid for or the person owes debt to the company. In the current case, Kelly would not
register the transfer of Bud’s 1 share to Jennifer because she simply dislikes people who live
together without being married.
Fortunately, there are several steps which Bud may take to have the share registered
under Jennifer’s name. First, according to the Corporations Act 2001 s.1072G (RR), the directors
of a Pty company may refuse to transfer shares for any reasons. Therefore, it will be difficult for
Bud to transfer the share to his girlfriend through this approach. However, if he asks his
girlfriend to go through the court as the transferee, then the registration may be effected. All that
will be needed is to prove that the refusal to transfer was without a just cause. The fact that Kelly
indicated her reason for not wanting to register the transfer makes it easier to prove that there
was no bona fide reason (Langford 2011, p. 220). Refusing to transfer simply because she
dislikes people who live together while unmarried is not a just cause. Their marital status does
not affect the reputation or performance of the company in any way. For instance, in the case Re
Winmardun Pty Ltd (1991), Waters’ application for transmission was refused because he was not

Company Law 7
a family member. The Court held that this was not a valid reason to refuse the transfer of shares.
The same can be applied in the current case.
Kelly’s Success in Amending Fresh’s Constitution
There are many rules set to assist in the amendment of the constitution of a company. In
this case, Kelly wants to amend the constitution through another extraordinary general meeting
whereby a shareholder with over 79% of shares can compulsorily acquire the shares of other
members. Although the majority is given the advantage of changing the internal rules of a
company or its own selfish interest, there is a limit which seeks to protect the minority (Hauser &
Lauterbach 2004, p. 1170). The majority have a benefit because no fiduciary duty is owed by the
majority to the minority (Scharffs & Welch 2005, p. 171). At times, members of the minority can
apply to the court for relief when the majority votes favor a resolution that constitutes a fraud.
This refers to any changes which places them at a great disadvantage of losing their shares under
unconstitutional means.
In the current case, Kelly is trying to fraud the minority members as she is the only one
with over 79% shares. She wants to make it compulsory for her to acquire the shares of other
members, which would mean they would have to lose their investments in the process. This is
the same issue that was experienced in the case of Gambotto v WCP Ltd (1995). Here, the
majority shareholder called a general meeting and passed a resolution that altered the company’s
constitution so that the majority shareholder would compulsorily acquire all the remaining
shares. The court ruled this move as invalid as it represented fraud on the minority. Therefore, it
is highly likely that Kelly will also not be successful in her quest as the action is only a way of
perpetrating fraud on the minority. If there was a good reason behind the move, that would have

Company Law 8
been plausible before the court, then the action would have been valid. Unfortunately, it appears
to be a personal move meant to reap off the shares of the other family members.
Recovering Compensation from Jenny’s Produce
As already identified, the directors of a company are those who are involved directly in
its formation and raising of capital. The directors of a company are considered to be promoters as
they have been contributing towards the growth of the company. However, when a promoter
breaches the duties assigned, there are specific remedies which may be sought under common
law. An example of such a remedy is the account of profits whereby the promoter breach is
forgiven in return of the company adopting its profits. Gluckstein v Barnes [1900] is a case
whereby the main company was able to recover all secret profits from the promoter who had
managed to keep the information secret for personal gains.
There is a breach of duty when considering how Fresh Pty Ltd lost a contract to Jenny’s
Produce Pty Ltd which is a company with Bud as the sole director. Bud is also a director of Fresh
Pty Ltd which means that he has a duty to it as well. This represents a conflict of interest as he is
most likely going to support the move that will benefit him more personally, which is what may
have contributed towards the loss of a contract. Therefore, Kelly has the right to seek
compensation from Jenny’s Produce in terms of the profits obtained from the contract with a
leading restaurant. The law allows such an occurrence especially since Bud is the sole director. If
there were other directors, then the fact that an innocent third party is involved would have been
considered.
Issuing of Extra Shares

Company Law 9
During the process of business expansion, more shares will be made available. If the
business expansion is being done by means of the company’s revenue, the current shareholders
should be the same individuals who are assigned shares depending on their dividends earned and
invested. However, if an external investor is being shared, then he or she will also be awarded
shares depending on the amount invested. Shares that occur as a result of the company’s revenue
should never be treated personal as all the other investors have contributed respectively.
In the current case, Kelly has decided to expand the business, and has awarded herself
another 80 shares, and 40 shares to her friend Bob. This issue can be challenged since she has not
followed the right approach. She is not the only shareholder in the company. Also, she cannot act
in a way that threatens the future of the company. Before the expansion decision was made, all
shares were already distributed to the company members. The members should have been
consulted on how to go about the distribution of shares so that the profits would not be lost.
Amending the Constitution
The constitution stipulates the product or object with which the company will be dealing
with. Before changing the main product of a company, it is essential to amend the constitution
beforehand as moving forward without amendments would mean going against the company
rules. As such, Kelly will need to call a meeting to delete Clause 1 of the constitution which
states that the company will focus on organic farming only. This will give room for a legal
incorporation of the restaurant idea.
A reason for amending the constitution is that the other shareholders will also be
involved. This will mean that their perspectives will be taken into consideration, thereby

Company Law 10
avoiding any challenges once the idea is incorporated. Therefore, the change in constitution will
have been passed as a result of the general meeting and voting of members.
Conclusion
It is evident that there are many rules that are meant to guide the process of incorporating
new businesses and how to manage them. The Corporations Act 2001 represents the various
rules and regulations which ensure a balance between stakeholders despite the various powers
they may have. It also protects the company itself from promoters who may take advantage of its
resources for personal benefit. The case study has presented a clear picture of how a company
may go through a series of challenges relating to the powers of members and that of the company
as well. The conflicting situations between the Board of Directors and the general meeting
powers also present loopholes whereby the latter is at an advantage.

Company Law 11
References
Adams, R, & Ferreira, D 2008, 'One Share-One Vote: The Empirical Evidence', Review Of
Finance, 12, 1, pp. 51-91, Business Source Complete, EBSCOhost, viewed 10 September 2018.
Asic.gov.au. 2018, Constitution and replaceable rules | ASIC - Australian Securities and
Investments Commission. [online] Available at: https://www.asic.gov.au/for-business/registering-
a-company/steps-to-register-a-company/constitution-and-replaceable-rules/ [Accessed 10 Sep.
2018].
Asx.com.au. (2018). [online] Available at:
http://www.asx.com.au/documents/asx-compliance/guidelines-for-notices-of-meeting.pdf
[Accessed 10 Sep. 2018].
Bay v Illawarra Stationery Supplies Pty Ltd (1986) 4 ACLC 429
Corporations Act 2001 (Cth)
Edmunds, R, & Lowry, J 2003, 'The Continuing Value of Relief for Directors' Breach of
Duty', Modern Law Review, 66, 2, pp. 195-223, Academic Search Premier, EBSCOhost, viewed
10 September 2018.
Gambotto v WCP Ltd (1995) HCA 12
Gluckstein v Barnes [1900] AC 240
Hauser, S, & Lauterbach, B 2004, 'The Value of Voting Rights to Majority Shareholders:
Evidence from Dual-Class Stock Unifications', Review Of Financial Studies, 17, 4, pp. 1167-
1184, Business Source Complete, EBSCOhost, viewed 10 September 2018.
Hill, JG 2010, 'The Rising Tension between Shareholder and Director Power in the Common
Law World', Corporate Governance: An International Review, 18, 4, pp. 344-359, Business
Source Complete, EBSCOhost, viewed 10 September 2018.
Lang, T 2005, 'Directors' Personal Liability- Is The Proposed Amendment To Section 197
Acceptable When Compared With Hanel V O'neill?', Deakin Law Review, 10, 2, pp. 732-758,
Academic Search Premier, EBSCOhost, viewed 10 September 2018.
Langford, RT 2011, 'The Duty Of Directors To Act Bona Fide In The Interests Of The
Company: A Positive Fiduciary Duty? Australia And The UK Compared', Journal Of Corporate
Law Studies, 11, 1, pp. 215-242, Academic Search Premier, EBSCOhost, viewed 10 September
2018.
LegalVision. 2018, How to Amend a Company Constitution | LegalVision. [online] Available at:
https://legalvision.com.au/how-to-amend-a-company-constitution/ [Accessed 10 Sep. 2018].
Leuciuc, EG 2012, 'Convening The General Meeting Of The Shareholders And The Voting
Right Of The Partners In Limited Liability Companies', USV Annals Of Economics & Public
Administration, 12, 1, pp. 277-283, Business Source Complete, EBSCOhost, viewed 10
September 2018.

Company Law 12
Price, LG 2011, 'The Concept Of Fiduciary Duty As A Basis For Corporate Ethics', Journal Of
Business, Society & Government, 3, 1, pp. 21-30, Business Source Complete, EBSCOhost,
viewed 10 September 2018.
Re Pembury Pty Ltd (1991) 4 ACSR 759
Salomon v Salomon [1897] AC 22
Scharffs, B, & Welch, J 2005, 'An Analytic Framework For Understanding And Evaluating The
Fiduciary Duties Of Educators', Brigham Young University Education & Law Journal, 2005, 2,
pp. 159-229, Professional Development Collection, EBSCOhost, viewed 10 September 2018.
Tracy v Mandalay (1953) 88 CLR 215
Venus, P 2016, 'How to avoid disqualification as a director by ASIC', Governance Directions,
68, 1, pp. 28-31, Business Source Complete, EBSCOhost, viewed 10 September 2018.