ACC520 Legal Regulations of Business Structures: Detailed Case Study

This case study delves into the legal regulations governing business structures, specifically focusing on scenarios involving company constitutions, pre-registration contracts, and directors' duties under the Corporation Act 2001. The first question analyzes the legality of altering a company's constitution to buy back shares from a minority shareholder who is also working for a competitor, referencing the Gambotto v. WCP Limited case. It further examines the liabilities associated with pre-registration contracts, particularly concerning a podcast supply agreement. The second question explores the duties of directors, including their obligations under Section 181 of the Corporation Act 2001, and analyzes whether the directors of a beverage company breached their duties by transferring assets to a new company to avoid financial liabilities. Additionally, it discusses the duty of directors toward individual shareholders. Desklib provides a platform for students to access similar solved assignments and past papers.

Running head: LEGAL REGULATIONS AND BUSINESS STRUCTURES
Legal Regulations and Business Structures
Name of the Student
Name of the University
Author Note

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Table of Contents
Question 1........................................................................................................................................2
Part 1A.........................................................................................................................................2
Constitution of a company: its alternation, procedure for alternation and limitations:...........2
Legality of the alteration done by Oh My Pty Ltd...................................................................3
Part 1B.........................................................................................................................................4
Pre-registration Contracts........................................................................................................4
Defense available to Gracey....................................................................................................5
Question 2........................................................................................................................................7
Part 2A.........................................................................................................................................7
Duties of the Directors.............................................................................................................7
Provisions for Directors’ Duty under the Corporation Act.....................................................7
Drink It Up Pty Ltd: Breach of Director’s duty.......................................................................8
Part 2B.........................................................................................................................................9
Duty of the Director toward Individual Shareholders.............................................................9
Kristofer’s Breach of Duty....................................................................................................10

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Question 1
Part 1A
Constitution of a company: its alternation, procedure for alternation and limitations:
The Corporation Act 2001 (CA) lays down the provisions for the inclusion of a
constitution for every company. It also lays down the provisions for making additions and
alternations to such constitution as well. The constitution of a company is the instrument that
holds the members together, along with the third parties too. The procedure to amend or alter the
constitution under the CA 2001 is laid down in section 1361.
Section 136(2) of the Act states that constitution of an organization or a company can be
changed by way of passing a special resolution2. While section 136(3) states that, such alteration
of the constitution would not have any effect unless the necessary procedures specified in this
section has been complied with3. Section 136(4) further mentions that the company is eligible to
alter the constitution, unless a contradictory provision is laid down in the constitution itself4.
Nevertheless, in Gambotto v. WCP Limited, it was held that the action of the shareholder
in relation to alter the constitution to buy back shares of the minority shareholders was struck
down by the court5. It was held by the court that alteration of the constitution to buy back
minority shareholder’s share would be unfair and oppressive unless there is a special purpose. It
1 Corporation Act 2001 (Cth) s 136
2 Corporation Act 2001 (Cth) s 136(2)
3 Corporation Act 2001 (Cth) s 136(3)
4 Corporation Act 2001 (Cth) s 136(4)
5 [1995] HCA 12

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was cleared out by the court that such alteration of the constitution is permissible when the action
of the minority shareholders are corrosive to the company or such minority shareholders compete
with the company. However, such modification is unjust and non-permissible if it is proven that
the majority shareholders are giving effect to it for their personal gains.
Legality of the alteration done by Oh My Pty Ltd
Under Section 136 of the CA 2001, a special resolution is required for the alternation of
the constitution, which requires 75% of the shareholders to hold a voting procedure to ratify such
alteration. Here, in the company Oh My Pty Ltd, the two directors hold 90% of the shares, which
makes them eligible to hold a special resolution in order to alter the constitution of the company
under section 136(2). Additionally, section 136(3) and 136(4) does not lay any hindrance in the
way of amending the constitution of the company, along with the fact that the shares that are
bought back belongs to a minority shareholder who holds less than 11% shares in the company.
Hence, as per the provisions of the Corporation Act 2001 the alteration stands just and valid6.
However, if it is judged from the point of view laid under Gambotto v. WCP Limited, the
intention of the majority shareholders behind such alteration needs is to be highlighted7. It is to
be understood that although the intention of the majority shareholders speaks for personal gain
and portrays oppression and injustice to Amaya, yet it is proven that Amaya was working for a
competitor company, which defeats the principle stated in the Gambotto case. Amaya has been
influencing Gracey to sell her podcasts to the competitor company as well, along with working
for the competitor company herself while working with Oh My Pty Ltd. Therefore it can be
6 Corporation Act 2001 (Cth)
7 [1995] HCA 12

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clearly seen that Amaya is competing with her own employer and so the alteration of the
constitution pertaining to the buying back of her shares was just, reasonable and valid.
Part 1B
Pre-registration Contracts
Section 131 of the Corporation Act 2001 lays down the rules for contracts and
agreements, which are entered into before the company is registered8. Section 131(1) of the Act
states that when a company enters into a contract before it was registered, then the company is
required to abide by such contract and work accordingly. The parties to the contract is entitled to
derive the benefits of such contract unless otherwise directed. Provided, such pre-registration
contract is ratified within the specified time or within a reasonable period after the company is
registered9. However, Section 131(2) says that a person will be required to compensate the
company regarding the contracts entered before registration if the company has not ratified such
contract within the specified time or reasonable time or if such company fails to register itself.
The amount that has to be compensated by the person would equal the amount, which the
company was supposed to pay if the contract was ratified and then not performed10. However, if
the court sees that the company is not ratifying the contract or has substituted it, then the court
has the power to bring in any action that it believes to be appropriate in such situation under
Section 131(3)11. The court may order the person to pay all or part of the compensation or return
the goods or services received in lieu of such contract. Section 131(4) states that the court may
direct a person who has failed to act wholly or partly according to the contract entered into
8 Corporation Act 2001 (Cth) s 131
9 Corporation Act 2001 (Cth) s 131(1)
10 Corporation Act 2001 (Cth) s 131(2)
11 Corporation Act 2001 (Cth) s 131(3)

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before the registration of the company, to pay in whole or in part, the compensation required to
be paid12.
Defense available to Gracey
Huw had entered into a contract with Gracey according to which Gracey was supposed to
supply weekly podcasts to Oh My Pty Ltd in exchange of $4000 per month. It was contracted
before the company was registered. The contract was signed between Gracey and the company
when it was named as ‘Gosh Pty Ltd’, which was later changed to Oh My Pty Ltd due to
unavailability of the previous name. Therefore, it is implied that under section 131 of the CA
2001 the company is liable to perform the contract as per the agreement and was required to
ratify the contract within a reasonable time after it was registered; the company however failed to
comply with either of these criteria.
Therefore, as Huw had entered into a contract with Gracey on behalf of the company, so
Huw would be liable to compensate Gracey due to non-ratification and. non-performance of such
contract under Section 131(2). Additionally, the court may direct the company to pay the
compensation wholly or in parts if Gracey makes a claim for it under Section 131(3). Lastly,
Section 131(4) empowers the court to direct the company to compensate Gracey if it is
established that the company ratified the contract yet breached it.
12 Corporation Act 2001 (Cth) s 131(4)

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Bibliography:
Corporation Act 2001 (Cth)
Gambotto v WCP Limited [1995] HCA 12

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Question 2
Part 2A
Duties of the Directors
Directors have been given various duties under the Corporation Act 2001 and under
Common Law, which can be categorized as general duties and statutory duties. The Directors are
bound to carry out their duties entrusted upon them and act in good faith as per the Common
Law which is vital for the welfare of the company. The unwritten principles of the Common law
have been given shape by way of a legislation. The Corporation Act 2001 under Section 181
lays down these duties of the Directors prescribed by the Common Law13.
Provisions for Directors’ Duty under the Corporation Act
Section 181 of the CA 2001 lays down the duties of the Directors and officers and direct
them to act in good faith. Section 181(1) requires the Directors and other officers to make use of
the powers and discharge their duties and responsibilities accordingly for the best interest of the
company14. Violation of Section 181(1) attracts civil penalty laid down under Section 1317E of
the same Act15.
In case of ASIC v. Adler, several breaches of duties by Director’s have been pointed out
by the court16. It was held by the court that the Directors had breached their duties under section
9 that lays down the definition of a director’s duty. Along with, section 180 that speaks for the
duty of the Director to act with diligence and car, section 181 stating the duty of the Director to
13 Corporation Act 2001 (Cth) s 181
14 Corporation Act 2001 (Cth) s 181(1)
15 Corporation Act 2001 (Cth) s 1317E
16 [2002] NSWSC 171

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act in good faith; Section 182 that lays down the provisions for misusing one’s position, Section
183 dealing with duty not to misuse information and Section 260A discussing about financial
assistance. While in Hutton v. West Cork Railway Co it was held that the power of a Director to
spend company fund for non-shareholder’s benefit must be put under certain limitations17. This
case was decided on the light of a company’s insolvency pertaining to its employees. In
Australian Metropolitan Life Assurance Co Ltd v Ure, it was held that the Directors must
exercise their discretionary power to refuse transfer of share for a legitimate and rational reason,
like refraining a bankrupt person to become a member, shareholder or enter into a contract with
company18.
Drink It Up Pty Ltd: Breach of Director’s duty
In the given case, it has been told that the beverage company Drink It Up Pty Ltd has
come up with the idea of forming a new company as they had major losses pertaining to their
fruit juice business while made remarkable profit on the spring water business. They shifted all
their assets to the spring water business, forming a new company named H20 Pty Ltd. It was
done in this manner to escape financial complexities that the company had to face due to the
heavy losses it suffered from the fruit juice business. This clearly implies that the Directors of
the company is making such arrangements to escape from the clutch of its creditors. As held in
Bell Group Ltd v Westpac Banking Corporation, financers take up huge risks while providing
finances to companies and therefore it is the duty of the directors to act in good faith for the best
interest of the company19. It is the duty of the director to act for a proper purpose relating the
interest of the company. Thus, the decision of Directors of Drink It Up Pty Ltd to divide its trade
17 (1883) 23 Ch D 654
18 (1923) 33 CLR 199
19 (No 9) [2008] WASC 239

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for improper purpose, wound up its old business and move all asset to the new company, H20
Pty Ltd cannot be considered just, rational and for the best interest of the company. It clearly
violates Section 181 of the Corporation Act and will be held liable under section 1317E to pay
fine which may extend up to $200000 or maybe disqualified from the post of Director under
section 206C of the same Act20.
Part 2B
Duty of the Director toward Individual Shareholders
The directors do not hold any general duty towards the individual shareholders. It was so
held in Percival v. Wright that the Directors only hold duty towards the company as a whole and
not to an individual shareholder21. It is not wrong on the Director’s part to buy shares from
shareholders who desired to sell their shares before the company was sold out. It was held by the
court that this does not amount to a breach of duty on the Director’s part as they are not liable to
meet any responsibility toward individual shareholders.
While the judgment delivered in Percival v. Wright was not observed in Coleman v Myer.
In this case it was held by the court that the Directors in certain circumstances hold liability to
the individual shareholders as well. It was directed by the court that the director hold fiduciary
duties towards the individual shareholders and for the purpose of which they are liable to
disclose the facts regarding a specific offer for the individual shareholders to know before
executing the transaction as such disclosure can change the approach and action of such
shareholders22. In several other case, it has been held by different courts that the Directors have
20 Corporation Act 2001 (Cth) s 206C
21 [1902] 2 Ch 401
22 [1977] 2 NZLR 225

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duties towards individual shareholders, in cases where the Director is required by the demand of
the situation to serve a bigger and greater duty towards the individual shareholders. It is to be
made sure that the Directors are trusted by such shareholders in acute need to sell his portion of
shares or for some other purpose.
In addition to the duties that the Directors hold towards the company and the shareholder,
they are also under the obligation not to carry out business when the company is insolvent.
Section 588G of the CA 2001 clearly specifies that a Director is refrained from carrying out any
insolvent trading and in doing so, they can be held liable personally for the losses suffered by the
financer.
Kristofer’s Breach of Duty
The dilemma regarding Kricstofer’s breach of Director’s duty depends on the fact
whether Kristofer had any duty towards Dhruv individually. The facts of Percival v Wright
matches with the situation of this case therefore the judgment of Percival v Wright can be
applied in this case as well. In the given case, the shareholders desired to sell their shares at a
lower price before the company is sold out as that would make the price of the shares much
higher. Thus, pinning on the judgment of Percival v Wright, it can be concluded that Kristofer
had no duty towards Dhruv who was an individual shareholder. However, there is exception to
the general rule which has been established in several cases like Coleman v Myers. Although it is
clear that such exception is applied only when it is observed that such individual shareholders is
vulnerable and depends largely on the directors with his shares in the company. In the given
problem, it can be clearly observed that Dhruv had no such vulnerability or dependence on
kristofer regarding his shares in the company. Therefore, the exceptional rule to the general

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principle does not stand in this scenario and Kristofer is in no way responsible to make Dhruv
aware of the fact that the company is soon to be bankrupt.

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Bibliography:
ASIC v Adler [2002] NSWSC 171
Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199
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