COMPANIES

Huddard Parker & Co Pty Ltd v Moorhead (1908) 169 C.L.R. 482
The High Court adopted a strict interpretation of s51xx to deny the Commonwealth the
power to make laws with respect to the creation of companies. This was based on the
interpretation of the word ‘formed’ – meaning already in existence.
(s51xx: empowered the Commonwealth to make laws with respect to “foreign
corporations, and trading & financial corporations formed within the limits to the
Commonwealth”)

New South Wales and Ors v Commonwealth (1990) 8 A.C.L.C 120

This case concerned a challenge by the States to the validity of certain sections of the
Commonwealth Corporations Act 1989. It was held by the High Court that s51xx did not
empower the Commonwealth to make laws with respect to the incorporation of trading
and financial corporations. Thus, provisions relating incorporation were invalid.

Re Wakim (1999) 17 A.C.L.C. 1055

The High Court held that the Federal Court had no right to hear and decide cases arising
under the Corporations Law of any State as these were within State jurisdiction.

Bond v R (2000) 169 A.L.R. 607

The Commonwealth DPP prosecuted Alan Bond for failing to act honestly in breach of
the WA Companies Code (equivalent: s181 of CA). Bond was sentenced to 3 years
imprisonment. DPP then appealed against leniency of sentence & sought to have it
extended to 7 years. It was held by the High Court on appeal by Bond, that the DPP did
not have the authority to instigate the appeal.

R v Hughes (2000) 171 A.L.R. 155

Commonwealth DPP prosecuted Hughes for obtaining funds from various investors and
investing that money in a US company in breach of WA Corporations Law. The High
Court dismissed Hughes’ argument that the prosecution was unconstitutional. It was held
that the Commonwealth had the power to prosecute as Hughes’ invested the money
overseas and that the Corporations (WA) Act 1990 gave the Commonwealth DPP the
authority to prosecute anyone who committed offences under the Corporations Law of
that State.

Derry v Peek (1889) 14 App Cas 337

With the special Act of Parliament and consent from the Board of Trade, a tramway
company issued a prospectus stating the use steam power instead of horse-drawn trams in
their company. P purchased shares based on this statement. Later, the Board of Trade
withdrew consent and P sued the directors for fraud. It was held that the directors were
not liable in fraud because they honestly believed the statement in the prospectus to be
true.

Saloman v Saloman & Co [1897] AC 22

Mr. Saloman was a sole trader of a boot manufacturing business and later sold the
business to a company he formed. From the sale Mr. Saloman received; cash, shares and
debentures (secured). Mr. Saloman became the majority shareholder and his immediate
family members also held shares. During the company’s operation independent lenders
also made loans to the company. When the company was wound up due to a downturn in
the economy there were not enough assets to pay Mr. Saloman and the other creditors.
Due to the secured charge Mr. Saloman had a right to be paid first before any of the
unsecured creditors. The unsecured creditors finding this unjustly attempted to stop Mr.
Saloman from being paid first by arguing; the company was an agent of Mr. Saloman as
he controlled it; the company was a trustee for Mr. Saloman; and that there was fraud
committed as the business was over-valued. The Courts rejected their claims by using
the concept of separate legal entity. A company upon incorporation has the legal
capacity to trade and incur debts separate from its directors and shareholders. (Note: there
was no fraud committed in this case)
Andar Transport Pty Ltd v Brambles ltd (2004) 206 ALR 387
Andar Transport provided a laundry delivery service under contract with Brambles with
Andar using its own truck and driver. The contract clearly stipulated that the employee
used by Anda to perform its duties was not an employee of Brambles. Mr. Wail was the
founder, shareholder, managing director and main employee of Andar whom executed
duties under contract with Brambles. Mr. Wail was formerly an employee of Brambles
until Brambles decided to outsource, thus he decided to form his own company. On one
of the job runs for Brambles, Mr Wail injured his back while unloading laundry, he
performed his job under a system of work originally designed by Brambles and then
continued by Andar (Andar took no steps to assess or modify the system of work). Mr.
Wail then sued Brambles for negligence as the work-system was developed by Brambles.
Brambles in turn sought a contribution from Andar towards damages. The High Court
held that it is the responsibility of the employer to provide a safe system of work. Thus,
Andar owed Mr. Wails a duty to provide a safe system to work. The majority held that
Andar had breached its duty of care by not ensuring the system of loading and unloading
laundry was safe for its employees. The significance of this case is that even though a
company may be owned or controlled by one person this will not affect its status as a
separate legal entity, nor its responsibility to provide a safe system of work for its
employees.

Re Darby [1911] 1 KB
Darby and Glyde formed a company and appointed themselves as sole directors. The
company purchased a licence to mine. The pair then floated the company called Welsh
Slate Quarries to purchase the licence at an excessive value. Shares were issued to the
public and the profits were shared between Darby and Glyde. Welsh Slate Quarries then
went into liquidation. The courts held that the company was formed for the purpose of
committing fraud and the liquidator of Welsh Slate Quarries was permitted to recover
damages from Darby’s estate.
Gilford Motor Company Ltd v Horne [1933] 1 Ch 935
Horne was the MD of Guilford Motors and his employment contract stated he would not
compete or solicit clients of the company during the term of the agreement or after he had
left the company for a period of five years. Horne resigned shortly and incorporated a
new company with his wife and an associate to compete against Guilford Motors.
Guilford Motors then sought an injunction against Horne for breaching his contract. The
courts held that Horne could not hide behind the concept of separate legal entity as the
company was created with the intent to commit breaches of the contract.

Green & Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1
Green was the manager of Bestobell Industries and as a result of his position in the
company he knew that Bestobell was submitting a tender for construction work. Without
notifying Bestobell, Green and his wife created their own company; Clara Pty Ltd to
submit their own construction tender. Clara’s tender was accepted over Bestobells’.
Bestobell took legal action against Green and Clara Pty Ltd. It was held that all profits
gained by Clara from the tender were to be awarded to Bestobell as Green had breached
his fiduciary duty.

Automatic Self-Cleansing Filter Syndicate Co v Cunninghame [1906] 2 Ch 34

Members resolved that the company should sell certain property. The directors with
management power refused. It was held that members could not interfere with
management as directors were given the power to manage under the constitution.

NRMA v Parker (1986) 4 A.C.L.C. 609

The constitution permitted the directors to determine the election process used when
appointing directors. Members with the support of over 100 members requested a
particular election process be used. It was held that the directors were right in their
refusal as it was unconstitutional.
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705
A ship owned by Lennard’s Carrying Co was transporting goods for Asiatic Petroleum.
Lennard who was an active director and managed the ship at the used an un-seaworthy
ship and while carrying oil for Asiatic it caught fire and destroyed the cargo on board.
The company tried to escape liability by arguing that it was the negligence of Lennard.
The courts held that liability could be imposed on a corporation for the acts of the
directors is the directing mind and will of the company.

Re Smith and Fawcett Ltd [1942] 1 All ER 542

Directors refused to transfer a deceased man’s shares to his son as the transfer would
have resulted in the son obtaining a large voting share. Thus, the directors exercised their
powers in good faith and in their ‘absolute and uncontrolled discretion without assigning
reasons’ offered a lesser amount. Lord Green MR is quoted stating; ‘A wide and
comprehensive power to directors by their passing a particular transfer the transferee
would obtain too great a weight in the councils of the company or might even perhaps
obtain control’.

Howard Smith Ltd v Ampol Petroleum Ltd [1974] A.C. 821

2 companies; Ampol and Bulkship together held 55% of Miller Ltd’s shares. They
decided to make a joint takeover for all Miller shares. Howard made its own takeover bid
offering a higher price. The board regarded Howard’s bid as the best interests of the
company and resolved to issue additional shares to Howard. This diluted Ampol and
Bulkships shareholding and gave Howard a greater chance in the takeover. It was held
that the directors had breached their duty and invalidated the share issue.
Ashbury v Watson (1885) 30 Ch D 376
Where the articles and memorandum conflict, the memorandum prevails over the articles
in regard to the inconsistency.

Allen v Gold Reefs of West Africa [1900] 1 Ch. 656

It was held; if a director enters into a separate contract with the company, the company
cannot avoid its contractual obligations by varying the constitution. In addition, an
alteration of the constitution was valid unless it was not for the benefit of the company as
a whole.

Shuttleworth v Cox Bros & Co Ltd [1927] 2 K.B. 9

The company’s constitution included a provision that appointed a person director for life.
The company altered its constitution to add an additional ground for removal, thus
enabling a director to be removed upon a written request signed by all other directors. A
director was removed from office. The court dismissed the director’s argument that the
provision in the constitution appointing him as a director was a contract that could not be
varied without his consent. The provision appointing him as a director for life was
subject to the statutory power given to companies to vary their constitution.

Hickman v Romney Marsh Sheepbreeders Association (Kent) [1915] 1 Ch. 881

Hickman was a member of Kent, an incorporated non-for-profit association. He began a
court action claiming irregularities in the affairs of the association. However, clause 49
of the association’s constitution provided that disputes between it and its members should
be by arbitration. Relying on this clause, the association sought to prevent Hickman’s
case from proceeding. The Court upheld the association’s case and dismissed Hickman’s
case.

John Shaw and Sons (Salford) Ltd v Shaw [1935] 2 K.B. 113
A majority of directors decided to instigate legal action against two directors who used
company property to benefit themselves. These 2 directors approached the general
meeting to pass a resolution to set the proceedings aside, which was granted by members.
The majority of directors ignored the order. It was held the power to initiate legal
proceedings was granted to directors per the constitution.

Foss v Harbottle (1843) Har. 461 E.R.189

Two minority shareholders commenced legal proceedings against the directors. The
shareholders claimed that the directors had misused the company’s assets. The court
rejected the claims and held that when a wrong is done to the company, it is the company
that has standing right to sue.

Royal British Bank v Turquand (1856) 119 E.R. 886

The constitution provided that the board of directors could borrow money if the general
meeting approved. The company borrowed money without consulting the general
meeting. It was held that the bank could assume the resolution was passed (codified -
s129).

BNZ v Fiberi Pty Ltd (1994) 12 ACLC 48

An officer of a company affixed the company seal on a lending contract, where in fact
this was a breach of the company’s constitution. Legal action was taken when the
company refused to honor the contract. It was held that the lenders could assume that the
company’s constitution had been followed and the affixation of the company seal was in
accordance with the constitution.

Morris v Kanssen [1946] A.C. 456

A director could not rely on the indoor management rule in regards to an issue of shares
to himself at a board meeting he attended. One of the reasons was that the indoor
management rule was intended for the protection of outsiders who are not aware of the
internal rules of the company. Another reason was that the director purported to act on
behalf of the company in the transaction with himself. Thus, he is aware of the internal
rules of the company.

Northside Developments Pty Ltd v Registrar – General (1990) 93 A.L.R. 385

Northside borrowed money from Barclays Bank. The loan documents were witnessed by
Sturgess and his son pretending to be the company secretary. The other directors were
not aware of the loan and the loan was not used for the company’s benefit. It was held
that Barclays Bank, should reasonably have been put upon inquiry and queried the loan,
especially where there is a suspicion of irregularity and it was reasonably apparent and
worth of inquiry.
Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D 156
The company’s constitution allowed the directors to borrow up to 1000 pounds without
the consent of the general meeting. Beyond that figure, approval was needed. The
directors, on behalf of the company borrowed more than 1000 pounds. It was held the
directors knew of the internal limitations of the company and thus the company was only
required to pay up to 1000 pounds.

Black v Smallwood (1966) 117 CLR 52

A contract was signed by two promoters as directors of a company that they believed to
be incorporated, but in truth the company was not registered. Legal action was brought
against them when they refused to continue with the contract. Their defence was that
they were agents acting on behalf of the proposed company. The High Court held that
neither the company nor promoters were liable on contract.
Note: If the evidence shows that a promoter contracted as a principal it can be
distinguished from this case.

Kelner v Baxter (1866) LR 2 CP 174

Three promoters signed a contract in their own names. They then incorporated a company
to ratify the contract as the company was in its planning stage. Ratification was not
successful because when the contract was signed, the signature and circumstances
demonstrated that the promoters intended to contract in their own right. In addition there
was no principal, so the contract was enforceable against the promoters personally.
Note: s131 of the Corporations Act allows ratification of pre-registration contracts of
overrides Kelner v Baxter.

Re Northwestern Autoservices ltd [1980] N.Z.L.R. 302

Director B of a 2-person company went bankrupt. Director A decided to appoint a new
director, with the intention of removing Director B without giving him any notice. The
quorum for a directors’ meeting was two. It was held, as there was no quorum, there was
no authority to make any appointment. The ‘new’ director was not legally appointed and
could not be counted as a quorum.
Claremont Petroleum NL v Indosuesz Nominees Pty Ltd (1986) 4 A.C.L.C 315
s203D permits a public company in general meeting to remove all appointed directors,
notwithstanding its reference to a singular director. Although there is a requirement for
public companies to have at least 3 directors, where members wish to remove all
directors it must immediately propose to replace the removed directors.

Re Smith and Fawcett Ltd [1942] 1 All E.R. 542

The directors refused to transfer a deceased man’s shares to his son, exercising their
absolute and uncontrolled discretion without providing reasons. The directors did
however offer a lesser amount instead. It was held that the directors acted in the best
interests of the company as the transferee may have obtained a great control over the
company

Re Lee Behrens & Co Ltd [1932] 2 Ch 46

It was commented that there are 3 tests to see whether powers were exercised for proper
purpose;
- Is the transaction reasonably incidental to the carrying on of the company’s
business?
- Is it a bona fide transaction? And
- Is it done for the benefit and to promote the prosperity of the company?

Aberdeen Railway Co Ltd v Blaikie Bros (1854) 1 Macq 461

Aberdeen entered into a contract with a partnership for the supply of several iron seats.
The company sought to avoid the contract on several grounds, including that at the time;
one of the partners was a director of the company. It was held that the company could
avoid the contract even though the terms were fair. There is a strict duty of directors to
avoid a conflict of interest.

Furs Ltd v Tomkies (1936) 54 C.L.R. 583

The managing director, Tomkies, sold Furs Ltd to a purchaser. The chairman told
Tomkies that Furs Ltd could no longer employ him and to make other arrangements.
Whilst still employed, he then entered into an agreement to work for the purchaser, he
disclosed this to the chairman but failed to disclose it to the other directors and
shareholders. Furs Ltd successfully sued for breach of duty as there was a clear conflict
of interest as Tomkies failed to put the company first.

Re City Equitable Fire Insurance Co Ltd [1925] Ch. 407

English case; A company sustained heavy losses caused mostly by fraud of the managing
director. The other directors were sued for breach of care and diligence. The constitution
exempted directors from liability other than losses caused by; their own willful neglect
and fault. The Courts held that the directors were protected by that provision. If it was
not for that provision, directors might have been held liable. It must be noted that this
provision is now void if included in the constitution. Directors must exercise the degree
of skill and diligence than an ordinary person is expected to take in similar
circumstances.

AWA v Daniels (1992) 9 A.C.S.R. 383 – Daniels v Anderson (1995) 13 A.C.L.C. 614
(Appeal case)
In AWA v Daniels an employee traded in the risky foreign exchange market and he
generated significant losses. He attempted to conceal these losses by making
unauthorized loans to cover the losses. Daniels, the auditor at the time warned the
managing director that the company’s internal controls were not satisfactory. This
information was not disclosed to the board. AWA sued its auditors for negligence in
failing to report inadequate internal controls over their foreign exchange trading
activities. The court held that the auditors were negligent by not following their concerns
up and that AWA and the directors had contributed to the negligence. On appeal, the
courts stated among other things; that non-executive directors are not subject to a lower
standard of duty than an executive director and that duty of care is not limited by lack of
knowledge, experience or ignorance.
Walker v Wimborne (1976) 137 C.L.R. 1
The directors of a company had moved funds between the companies to enable various
debts to be paid and used assets of one company as a security for loans obtained by
others. The companies went into liquidation and the liquidator took legal action against
the directors claiming fraud, negligence and breach of duty. The courts held that in a
group situation, individual companies owe a duty to their own shareholders and to their
creditors as solvency declines.

Peter’s American Delicacy Ltd v Health (1939) 61 C.L.R. 457

In Peter’s company a resolution was passed to allow bonus shares to be issued in
accordance with paid share value (partly paid shareholders will receive fewer bonus
shares than fully-paid shareholders). It was held that the resolution was valid as members
can vote in their own interests and there was no evidence of oppression or fraud.

North-West Transportation v Beatty (1877) 12 App. Cas. 589

It was held that a shareholder may vote as he/she desires even when his/her interests are
different from or opposed to those of the company. Shareholders are not directors,
trustees or partners thus they do not stand in a fiduciary position with one another.

Mills v Mills (1938) 60 C.L.R. 150

The directors passed a resolution providing that the company’s dividend distribution be
by bonus shares to ordinary shareholders. This transaction also indirectly increased the
voting power of the managing director. A minority director challenged the validity of the
resolution on several grounds including on the basis that the majority directors did not act
in the best interests of the company. It was held that the resolution valid despite the fact
that the directors received a benefit under the transaction. Directors will not
automatically breach their duties if they act in a manner that benefits a class of
shareholders in which they themselves are shareholders.
Brown v British Abrasive Wheel Co Ltd [1919] 1 Ch 290
B Ltd required more capital and the majority of shareholders (holding 98%) were
prepared to provide additional capital on the condition that the minority 2% sell their
shares to the majority. The minority refused to sell and the majority altered the
constitution enable the majority to purchase the shares of the minority. This act was held
to be invalid as it was not for the benefit of the company as a whole.

Cook v Deeks [1916] A.C. 55

Toronto Construction had 4 directors (also members) in their company, due to a
disagreement between them, 3 of the directors formed a new company to carry out a
contract that they had negotiated on behalf of Toronto Construction. The 3 directors then
tried to ratify the wrong by voting at a general meeting (3/4). It was held that the
directors had breached their fiduciary duty and abused their power of the majority.
Allen v Atalay (1994) 12 A.C.L.C. 7
Creditors sought an injunction under s1324 where the company was selling company
assets below the market value.

Sharp v Dawes (1876) 2 Q.B.D. 26

The secretary called a general meeting which was allowable by the company rules. Only
one person attended. The business of the meeting was discussed and calls on
shareholders were made. D was sued for failing to pay the call, his defense; the call was
not validly made as it was not made at a general meeting. It was held that one person
cannot constitute a meeting.

Humes Ltd v Unity A.P.A Ltd (1987) 5 A.C.L.C. 15

A resolution to remove directors failed to pass at the recent AGM. Members holding
more than 5% of votes called for another general meeting to remove the directors. The
directors refused to hold the meeting on the basis that; it was an act of bad faith, the cost
was a waste of company funds and the resolution had no chance of success, based on the
AGM. It was held, that the members had a right under s203D, to remove directors and
they were entitled to attempt to exercise this right.
Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1988) 51 S.A.S.R. 177
It was held that a shareholder has a personal right to bring an action where it is alleged
that an issue of shares was made for improper purpose.

Ord Forrest Pty Ltd v FCT (1974) 130 C.L.R. 124

When the board considers issuing shares for consideration less than their market value,
they must take into account the rights of shareholders, including the right to participate in
the distribution of the company’s assets in a winding up or on a reduction of capital. If
the issue is not equal and fair to all shareholders, the value of interest for some existing
shareholders may be reduced.

Marra Developments Ltd v BW Rofe Pty Ltd [1977] 2 N.S.W.L.R. 618

A company made profits for the year ending 30 June 1974. The profits were adequate to
permit a declaration of dividends which was declared on the 10th of Dec 1974. Dividends
were immediately payable but not in fact paid. After the declaration, the company
revalued its assets which were written down with the result that ended with a significant
loss at the year ended 30 June 1975. A shareholder sued the company for payment of the
declared dividend. The company argued that the payment of the dividend would be in
breach of law as it could not pay dividends out of profits. The Courts rejected the
argument on the grounds that at the time of declaration the dividends were available for
distribution and later events did not give the company a defence against the action.

(NOTE: Amendments made in 1998 altered the provisions regarding final dividends and
regards them in the same way as interim dividends. S254V(1): a company does not incur
a debt merely by fixing the amount or time for payment of a dividend. The debt arises
only when the time fixed for payments arrives and the decision to pay the dividend may
be revoked at any time before then. If the company however, has a constitution that
states for the declaration of dividends, the company incurs a debt when the dividend is
declared.)
Trevor v Whitworth (1887) 12 App. Cas. 409
Whitworth died and his executors attempted to sell his shares back to the company. The
company’s constitution also permitted this. The company then went into liquidation and
the executor sought the proceeds from the sale of shares from the liquidator. It was held
that creditors have a right to rely on the company’s capital and the company should not
spend its funds buying back shares.

Dimbula Valley (Ceylon) Tea Co Ltd v Laurie [1961] Ch 353

It was held that where the constitution of the company permits, a revaluation of
unrealised fixed assets, made in good faith by competent valuer may be distributed
legally as dividends.