Lecture 1

- Company Law
- → legal rules of governing : Formation and termination of companies,
characteristics of companies
- Company : Artificial legal entity
Sources of rules
- Corp act 2001 → Legislation, statute ( Statutory rights : Rights under the Act)
- Case law → precedents ** developed law that judges over years have decided
Operation of company law
- Private law : Shareholder vs the company ( Individual rights )
- Public law : ASIC punish wrongdoers and seek compensation for company ( Send
message or deterrence to the corporate community )

4 elements to answers : ​IRAC : Issue, Rule, Application and Conclusion

ISSUE RULE APPLICATION CONCLUSION

- The case is the law

Introduction to companies

- used to bring people and capital together to run a business

Capital structure - company set out, and need money to operate

- Equity capital ​: contributed to the company by shareholder → ​money that the
owners put in
- Shareholders called ​members​ in the Act - owners of the company
- Equity is generally not repaid during the life of the company
Debt capital​ :
- Owed by the company to outsiders called ‘creditors’ : employees, suppliers, lenders
- Employees are paid in priority to everyone else
- Every creditor takes before shareholders
Equity or Debt to run business
- Equity : money is at stake, shareholders have voting rights
→ Dilutes power when someone invest in company
 - Debt : Risks of inability to repay its debts ( Co is unprofitable, hence unable to pay
up debts )
- Secured creditors are covered first then priority shareholders

Management Structure
- How a company is managed? Dependant on its size
- Small business owners/shareholders may also be directors and employees
- * Can be director and employee of the business
- Directors who are shareholders → likelihood to act in their own interest to inflate
share price
→ Shareholders have a right to vote on some issues :
- Control Votes ( To vote directors out of a company )
- Veto/approval votes ( Change company constitution ) - Return share capital , need
shareholder votes
- Shareholders do not have the right to tell management how to run the company

Separate legal entity doctrine

- Company is a separate legal person
- 2 types of legal persons in the world : Humans & Companies
- Company can issue shares
- Company can incur obligations and hold rights, and sue and be sued, in its own
name
- Company can contract with its controllers and others
- Company has ‘ perpetual succession ‘ → shareholders can die, company would not
be affected
- Company is a separate taxpayer

Separate Legal Entities

Case : Salomon v Salomon
- Mr Salomon - possess different roles - : Director, majority shareholder, employee,
secured creditor under the debenture securing the debt
- Unsecured creditors were very unhappy when they saw Mr Salomon asserted his
right as a secured creditor, cease the business
- Company and controller separate legal persons?
Conclusion : No matter how small the company is, the shareholders and the company are
separate legal persons

Case : Lee v Lee’s Air Farming Ltd

Issue : Could Mr. Lee be both the controller of a company and its employee? Widow claimed
on compensation policy
Conclusion : He was entitled for the compensation, because company is a separate entity

Case : Macaura V Northern Assurance

Conclusion : Macaura had his own personal insurance, however because the company is a
separate legal entity, despite the forests being burnt down, the company is not entitled for
the insurance.

What are shares?

- Claims against a company to which ‘rights’ attach → Rights exercised against the
company
- Share of a company does not involve any company assets
- 3 classes of shares - Ordinary A, B, C → (set up own company regime of rights)
- Between companies the shares are NOT IDENTICAL

Proprietary
- Sell shares back to existing shareholders
Companies can be shareholders in other companies
- Subsidiary companies
- Same rights as humans as shareholders

Separate legal entity : Limited Liability

- Debts payable by company only
- Limited liability company : Shareholders liability is limited
- S 516​ : Company limited by shares, member is limited to the amount that is unpaid
on their shares
- If shares are fully paid, no further contribution is required
- Company may issue shares that are partly paid → Shareholders obliged to
contribute further if ‘call’ is made on partly paid shares
In the event the company collapses and there is still unpaid shares, the liquidator would
demand for the shareholders to put in the amount unpaid → ​shareholders are still liable.
 - Call not paid, shares may be forfeited

Classes of shares
- Issue shares that have no control voting rights
a) Dividend rights : Company dont make profit, there is no dividend
b) Voting rights
c) Rights & priorities in repayment of capital on surplus on winding up
- S 254 B : Company decide these rights
- S 198 A : Directors have right to issue shares

Preference Shares
- Usually carry rights to :
a) Fixed dividend
b) Priority of repayment of capital
c) Limited voting rights
d) No right to share in surplus on winding up

Lecture 2

Business Planning & Setting up Companies

Distinguish between :
- Unincorporated entities : Sole trader, Clubs & Partnership ( Collection of sole
traders working together )
- Incorporated entities (‘corporations’ , ‘companies ) are separate legal persons
( Describe whether something is a company )

- Unincorporated entities have no legal personality

- If partnership cannot pay its debts, partners are personally liable for it
Relevant considerations : Choice of form
1. Intention to make a profit? Or non-profit?
2. Limited liability or unlimited liability for shareholders?
3. How big the business to be?
4. Do you need to raise equity capital ? → Partnerships cannot request for equity
capital
5. Comply with formalities and pay expenses → company has to comply with ASIC
6. Are you willing to submit your business to audit and reporting requirements? →
Want privacy, cant be done via incorporated company

Choosing a Company

Company Partnership

- Can have more than 20 members - Top limit is 20 members, because of

mutual trusts and confidence → all
liable for each others’ debts

- Limited Liability

- Easier to raise capital

- Different tax treatment - dividend

imputation ( Profit taxed only once)

- Company law as standard for

contract

- Flexibility

Disadvantages

- Usually greater expense in - Can be formed anytime, anywhere

formation and compliance

- Depending on the size of company,

need to reveal information to the
general public
 - Smaller company, lesser to
disclosure, bigger company, more
to disclose

Piercing the corporate veil : Corporate entity to be disregarded and the humans behind it to
be liable
- Disregard of barrier between company and humans
- Piercing the corporate veil means making shareholders liable for corporate debts

Case : Gilford Motor Company v Horne

- Horne, employee of Gilford Company
- Horne want to leave and set up rival business
- He use wife as a business associate and compete as rival
Argument : It is the company that is competing against, not himself as an individual →
deliberate strategy to sidestep existing competition
Conclusion : Deliberate strategy to sidestep the legal obligation, pierce the veil

Case : Jones V Lipman

- Transfer land to the company
- Land owned by separate legal entity → company was set up on purpose to avoid the
legal obligation
Statutory veil piercing
- S 588 V

Types of companies

- Companies are classified in 2 ways : Ltd and Pty Ltd

Public ( LTD ) ​ → company limited by guarantee

- Local tennis club, does not need share capital
- Raises money via membership fees
- Given a company were to be liquidated, the members will pay a token amount
- Separate legal entity that is formed for the formation of contracts

Proprietary ( PTY LTD ) ​→

 - Company limited by shares : Shareholder liability is limited to the amount of shares
that they own
- Unlimited company : professionals who are not able to limit their liabilities :
Contract of workers/ lease of computers
- No liability company : Only mining companies can be of no liability, to minimise the
loss of the company

Proprietary Companies ( Private Public Companies ( ANY number )

Companies) : no more than 50
non-employee members

Far less public scrutiny → audits ( no I shareholder/ 1000,000 shareholders

mandated reports )

Less compliance obligations 3 directos ​S201A (2)

S113 : Law keeps them small, when 50 Unlimited number of shareholders

shareholders, there will be a close
relationship amongst everyone → when
there is an issue, discussions can be done
easily with each other.

S 113 : No fundraising activity → way they Can raise funds from the public
get the shareholder, not through public
documents : hard to raise capital

Not allowed to issue shares to public, but

can only issue shares to 50 members

Not offering shares to strangers Subject to stricter rules → more

procedures eg compulsory annual general
meetings

S201A​ → 1 shareholder 1 director More publicity → published financial

statements

Joe Bloggs Plumbing PTY LTD : raise capital Aim : greater shareholder protection
from friends and family investing in shares through transparency and accountability

Company limited by shares / unlimited

 company with share capital

Rules are more flexible and adaptable to

family private business → more flexibility,
more privacy

FAMILY IMAGE

Corporate Groups
- Holding company: 50% of shares held for subsidiary → a holding company has the
power to appoint the subsidiary’s board , and therefore is in the position to tell the
company what to do
Registering Companies
- Companies created through registration by ASIC
- Names ​S148 : - Public companies (LTD)
- Proprietary companies ( PTY LTD)
- No liability (NL) : eg ( mining companies )

● Point of letters behind the name : if we contract/ work with the company, if company
descends into insolvency, shareholders cannot cover for that

Internal Workings for the Company

- Every company can decide their own internal workings
- Replaceable rules (RR) : we can replace them if we want to
- Constitution : All the internal rules of the company
- S 134 : A company can be either entirely replaceable/ constitution or a mix of both
- Default rules (RR) S 141 → can be changed **, quorum, default rule in the company
is 2 pax if there is only 2 people in the company

● Default rules are there until they are replaced

Eg of RR : ​The quorum can be altered to 50 if there is 200 people in the company : to be able
to pass decisions in the meeting
Replaceable Rules ( RR )
- Introduced in 1998
- Companies formed prior to 1 July 1998 → old memorandum
- S135 (2) → can be changed
- Not law of the land, law of the company that can be altered

Constitution
- Set of actual rules of the company
- It has the effect of a contract
- Company adopt a constitution, when registered or later
- It can be changed s136 - 75% ​s9-2​ , special resolution ( call a vote, can amends term
of constitution

Steps to modify or replace a rule :

1. We need a special resolution of members

2. Adopting, amending or repealing a constitution after registration requires a special
resolution of members ​s 136 (2)
3. Special resolution - s 9 : 75% vote of those present who are entitled to vote
4. What percentage of shares to block a change of constitution : 26%
5. 26% : likely to be a blocker vote to block special resolution

Proxys are counted / people who turn out in the meeting are counted
Who are entitled to vote : Preference shareholders have no control to vote **

10 people turn up, 100 shareholders, no one sent in proxy

- To pass special resolution, we need 8 people to pass the resolution
- Quorum is 5
- 75% of those who turn up to vote / sent a proxy
Case : Eley v Positive Govt Security Life
- Constitution named him as solicitor of the company for life, they then dumped him
as solicitor and he sued the constitution
- Application of facts : breach of contract → use contract law rules for interpretation
and remedies
- ** not contract between company and its employees , hence Eley can only sue on
employment contract

Oppression remedy : S232 to S 234

- Broadly expressed power about how we are treated
- If we have been genuinely unfairly treated as a member ( creditor, employee or
director ) the oppression remedy can be adopted
- Company does not follow constitution → procedural irregularity
- A breach of constitution, is NOT, a breach of the act S 135 (3)

Single directors/ shareholder companies

- 1 director 1 shareholder
- Only a proprietary companies
- RRs do not apply - s135 (1)
- Special rules apply → documentation/ compliance and board resolutions because
there are stakeholders whom are affected.

Summary Table :

S 134 - Company can either be entirely

replaceable/ constitution or a
 mix of both

S 141 - Default rules - Can be changed

- Quorum

S 135 (2) - Replaceable Rules (RR) can be

changed

S 136 - Constitution can be changed

S 136 (1) - Adopting a constitution - Can be done on or after

registration

S 136 (2) - Adopt, amend or repealing a

constitution after registration
requires a special resolution of
members

S 9-2 - Special resolution

S9 - 75% of vote of those present

who are entitled to vote
- 26% to block change of
constitution

S 140 - Company’s constitution and the

RRs that apply to it have effect
as a contract between :
a) Company and each member
b) Company & each director and
secretary
c) Member and each member
● Member = Shareholders

Replaceable Rules S 141 - Appointment of Managing

Director
- Terminating appointment of
MD
- Calling a directors’ meeting
- Quorum at directors meeting
- RR about shares : 1 vote -
 per/share

S 202 (RR) - Deciding what directors are

paid

S 249 x ( Proxies ) - Mandatory for Public

Companies
- Replaceable for PTY LTD (
Proprietary )

S 203 C - Members remove directors by

ordinary resolution **simple
bare majority → 50% of more

S 254 D (Pre-emption) - RR for proprietary

- If company was to issue new
shares, they should issue to the
current shareholders first <
family relationship >

Lecture 3

Decision Making in Companies

Law allocate decision-making power in a company

- Members voting together // shareholder voting together in a shareholder meeting
- Board of directors
 ● Capacity of a director and a shareholder is different
● Directors cannot remove another director from the board
● Shareholders can remove a director from the board

Who runs the company day to day?

- Board of directors

S 198 A - RR - Business of a company is to be

● Company can change this rule managed by or under the direction
of directors

S 198 (2) - A list of company or all

shareholder/director power
- If shareholder has no power, then
the B.O.D has power

S 198 A - RR - BOD have general power of

● BOD can make all decisions except management
for those given to members in the
general meeting by the Act or
RR/Constitutions
● Shareholder powers is limited to
the power that they exercise in a
shareholder meeting

S 198 D - Constitution permission of the BOD

S 198 C - RR - Board delegates the management to

the CEO/MD

What if members dont like what the board decides?

- Members cannot interfere with the power of board
- To get rid of the board, vote in and vote out directors require 50%
- Options that are available to members who disagree?
a) Vote out board
b) Sell shares
c) Change S198A (RR ) or other rules → we need a 75% vote to change company’s
constitution
If company breach constitutional rule, shareholders are NOT, allowed to hold them
accountable.
Shareholders are only limited to shareholder type rights → not rights to tell the company
how to behave
Shareholders are NOT allowed to tell a company’s directors what to do

Appointment of Directors

S 201 G - RR - Members elect directors by

ordinary resolution ( Bare majority
of 50%)
- Casting vote by the chair in the
shareholder meeting inf necessary (
51-50)

S 201 H - RR - Directors DO NOT, have the right to

make a casual appointment→ only
to make up the statutory
requirement given a director has
resigned or died and needs one
director to fill up the vacancy

Members Remove Directors from Board

Law Proprietary ( Pty Ltd ) Public Companies

S 203 D - Directors must be

removed by
ordinary resolution
( 50% bare majority
 )
● Shareholders will
always have the
right to remove
directors

S 203 C - RR - Directors removed

by ordinary
resolution (Bare
majority )

S 203 E - Directors of a
company cannot be
removed by other
directors.
- Public company
shareholders always
have the right to
remove directors.
● Shareholders of the
public company can
remove inefficient
directors, but the
other members of
the board are not
allowed to →
Prevent silencing of
directors

S 203 C - RR - Members by
resolution can
remove directors
from the board

S 201 K (RR )​ - long service leave, I can appoint someone in the board to fill in for me during
that period.

201 J (RR​) - Directors appoint managing director

S 248 E ​- Directors elect chair of board, different from managing director.

S 203 F​ - Directors can revoke appointment of MD

Part 2D.6​ - Disqualification of a Board

Who can be appointed?

1. S 201 D : Someone who consents

2. S 201 B : Human not company
3. S 201 B : Minimum 18 years old
4. Not disqualified → cannot be bankrupt, convicted of certain offences

S 9 : De-facto and Shadow directors

De facto Shadow Directors

- Act as a director, but not legally - Don’t call themselves as directors,

appointed they call the shots and tell the
- Have to take responsibility for board what to do
certain actions

Standard Chartered Bank v Antico

- Duties and accountability of directors can be imposed on someone ( Human/ Body

corporate ) who is not appointed as a director.
- Company A effectively dominated company B
Rule : Court filed that company A as a shadow director of Company B, held as a “shadow
director” for insolvent trading

Buzzle v Apple
- Apple gave Buzzle instructions and advice regards to the sales.
- Apple regarded as shadow director? NO
- Must exists a causal connection between 2 parties : - ‘accustomed to act’ requires
habitual compliance over a period of time
 - Directors must collectively be accustomed to the act of shadow directors.

How does the BOD operate?

- On the BOD, 60% of shares held by one person is NOT MORE POWERFUL than 40%
of shares held by another person
- One face, one vote → One vote per human on the board of directors

ASIC v Healey
- Responsibility of directors of large listed company → approve accounts which failed
to disclose a number of significant matters.

Board Meetings
- S 248 C (RR ) : All directors must receive a “reasonable notice”
- S 248 E (RR) : Chair of board meeting elected
- S 248 F (RR) : May have quorum requirement
- S 248 D : Use of technology ( video conference, telephone ) → all directors must
agree
- S 248 A ( RR) : Paper meetings are possible

What can members decide?

- Members’ votes are done in general meetings

Members approval is required to : all 75% vote ( those who are entitled to vote and turned
up to vote )

Considered as special resolution (Requires 75% vote of all members)

S 136 (2) - Change the constitution

● Adopt, modify or repeal the
constitution
 S 157 - Change of the company’ name

S 162 - Change of the type of company

● From proprietary to public

Variation of class rights

- S 250 E​ : Company has 1 class of shares ( ordinary shares with 1 vote per share ) - 2
shareholders - 50% capital

Greenhalgh v Ardene Cinemas

- Body of case law developed for protection of class right
- * i start with 1 v per share, the other shareholder is 10 v per share
- * unhappy , my power is diluted - previously on equal level and now they can
outvote me
S 246 (1)
- Ord A from 1 → 10 ( had their class rights varied )
- Ord B from 1 → 1 ( Deemds ord B to have their right varied)

S 246 (2)
- If some of the shares in the class have different rights, deem everyone in that class
rights to be varied

1. Can company issue shares

- S 124 (1)(a) : Legal capacity and power of company
- S 254 A (1) : Power to issue

2. Does it lead to variation of class rights?

A. Is there a variation of class rights?
General law
- Greenhalgh v Ardene Cinemas
- White v Bristol Aeroplane Co
→ Actual legal rights have been altered
→ Company proposed to alter the actual legal rights attaching to the shares
Statutory 246 C deemed variation (1) (2) (5) (6)

Section 246 C: Certain actions will amount to variation of class rights

- S 246 C (1) : Splitting a class into 2
- S 246 C (2) : Varying the rights of some members only
- S 246 C (5) : Issuing new shares where only one class at present
- S 246 C (6) : New preference shares rankiqually with existing preference shares

B. If yes, what is the procedure?

- Constitution S 246 B (1)
- No constitution S 246 B (2)
3. Unfair prejudice? If proper procedure with class rights varied.
- S 246 D (1) : without ananimous support of class
a) Variation of cancellation of their rights
b) Modification of the company’s constitution to vary or cancel their rights
Member with >10% vote may apply to the court to have the variation, cancellation or
modification set aside.
- S 246 D (2) : application must be made within 1 month of variation
- S 246 D (5) : court may set aside variation given it unfairly prejudice the applicants

Lecture 4

Members meetings and restriction on decision making - How do we protect the rights
of shareholders?

Types of members’ meetings

- S 250 N ​: All PUBLIC companies must hold on AGM
- Proprietary companies have the option to, as the change of directors are not
necessarily done annually
 - Extra General Meetings ( EGM ) → only for PUBLIC companies, conducted in
between AGM
Meetings called by

S 249 C - RR - A single director ( 1 ) has the power

to call meeting of shareholders →
concern about a management
problem or financial issue

S 249 CA ( Not a RR ) - A single director in a public listed

company may call a meeting of the
company’s member

S 249 G - Calling of meetings of members by

the Court

Can members call a meeting?

S 246 D : ​Allow shareholder to ask for meeting :

a) Hold either 5% or more voting capital
b) 100 members or more of the shareholders

- Require a minimum % to pass a resolution : 50 % is required ( 26% block)

Eg : i ) To elect someone to a board → require 50% to do so

ii) To change the company’s constitution → would require a special resolution ( 75%)

S 249 Q ​: Proper purpose : Shareholders have the right to vote on the topic ( eg :
Shareholders may vote on members of the board and changing the constitution )
● Does not matter if the motive is improper, the purpose of the meeting has to be
proper.
● Initiate a resolution that a constitution to be changed
Improper purpose : Shareholders are not allowed to tell a board on how to run a company

NRMA V Scandrett​ : If the purpose of the request to hold a meeting is to consider and pass a
resolution, this is a proper purpose, and it is not relevant that the shareholder requesting
the meeting is motivated by ill will or self-interest.
S 249 E ​: If directors dont call the meeting → Shareholders can convene the meeting and the
directors have to pay for the meeting ( from own pockets )

S 249 F​ : Shareholders have to pay for a meeting themselves → it is quicker to conduct a

meeting themselves ( can be conducted when in a hurry )

Member’s Meeting agenda

- Only matters that have been include in the notice , can be discussed at the meeting
- 250 R → matters stated in the 250R (In case of AGMs done ) can be discussed in the
AGM despite not being referred to in the meeting notice :
a) Financial reports
b) Election of directors
c) Appointment of auditors
d) Fixing auditor’s remuneration

Member’s rights to put resolutions ( Decisions )

- 249 N : Members can request for the inclusion of resolutions to be put to the
members at the next meeting
a) Members with at least 5% of the votes that may be cast on the resolution
b) At least 100 members who are entitled to vote at the general meeting
- Company must also send out notice of member resolution → A member may put an
item on the agenda ** Given the constitution is requested to be changed, 1000 word
statement is needed as to why it is a good idea
- Change of constitution is not enforceable towards directors as a breach of contract

Giving Notice of the Meeting :

- 249 H ​: 21 days
** Consent to short notice is possible ( AGM - all agree , EGM - 95% agree )
** Short notice is not applicable for removal of directors
- Notice period (21 days ) can be reduced → intention for public company director
to be removed
→ Only shareholders can remove public company directors
 - If board is unhappy with one director → AGM notice of meeting ( Removal from teh
board ) * The public company director can attend and make their stand

S 249 HA : ​ Listed public companies → 28 days of notice ( Shareholders need to receive

proxy, fill up and send back /attendance to AGM )

S 249 J ​: Notice must be given to members and directors

S 249 K ​: Notice given to auditor

Contents of the notice :

- S 249 L : S 249 L (1)(c)​ : Special resolution

- Devereaux Holdings​ : Fully inform shareholders on ​matters that shareholders need

to vote
- Devereaux Holdings​ : Must fully and fairly inform and instruct the shareholder about
the matter on which he or she will have to vote.
- Common in annual reports → too many information and hard to find exactly what
we are looking for
- Need to balance the information presented, to make it accessible → must not be
misleading

Conduct Of Meetings :

- S 249 T (RR)​ : Quorum to conduct a meeting

→ RR : 2 ( if the company has 4 or 5 shareholders )
** Quorum for a meeting of members is 2 members and the quorum must be present at all
times

- S 249 S​ : Use of technology is permitted

** Mining companies → shareholders are unable to attend physically hence done through
video calls
 - Proxies​ → unable to attend a session, we will fill up a proxy to display decision
** Proprietary companies can refuse to allow proxy votes

- S 249 X​ : Corporate representatives are allowed

- S 249 U (RR)​ : Directors would elect the chair of the meeting ( Largest shareholder
to time can be the chair of the meeting )

- S 249 B​ : Single member companies : Decision making can be done without a

meeting
● Need to record important resolutions
● Resolution can be passed (Single member companies ) : member record and sign (
Minutes )

- S 249 A :​ Proprietary company uses flying minutes (All members entitled to vote
must sign a document agreeing to the resolution )

Voting:
- S 250 E (RR )​ : Default vote of 1 vote per share
● Preference shareholders right to vote depends on their defined class rights

- S 249 Y​ : Voting by proxies

- RR S 250 J​ : A resolution put to vote at a meeting of a company’s members is decided

on a show of hands unless a poll is demanded.

- RR S 250 E​ : Casting vote

SHAREHOLDER REMEDIES :
Irregularities :

- S 1322 : Outcome of meeting may be valid despite irregularity

● Failure to follow required procedure
( If no one was greatly hurt, the law will pretend that nothing has happened )
- Applies to “proceeding under the Act” - includes directors’ & members’ meetings

Mechanisms :
1. Automatic validation ( Meeting had problem, quorum is insufficient ) * it is valid
until it is invalidated
2. Curing declaration ( Procedural error, court declare that it is alright ) “ Invalid until
a court says yes

Provision → 1332

The proceeding is not invalidated ( VALID ) because of any procedural irregularity, unless
the Court is of the opinion → irregularity has caused or may cause ​substantial injustice
that cannot be remedied
● Let meeting exists as though there is no problem with the meeting unless
shareholder can prove that there is substantial injustice ( Notice, Quorum ) that
caused a disadvantage

Automatic Validation : It is valid until it is invalidated ( Onus on the person arguing

invalidity)
Provision 1322 :
- Complainers on the receiving end of a procedural irregularity → apply to court to
have the proceeding invalidated
→ If special resolution passed (75%) and I didnt get my notice of meeting, i only hold 2%, is
it considerable that my failure to attend has caused me substantial injustice?
Given i held more votes (26%) / (20%) , things would have been different

● Look at influence towards the special resolution

Curing Declaration : ( Onus on the person arguing validity )

- Person who wants the irregularity fixed will bring the issue to court
- If procedure done correctly, the proceeding would have been different
S 1322 (4) → (6) : Court can declare that an act, matter or thing, or proceeding is not invalid
as long as :
1. Procedural in nature
2. Person acted honestly
 3. Just and equitable to make the order
4. No substantial injustice

1322 (4) : Weinstock v Beck

- Weinstock should have been reelected every 3 years, however, after 3 years he
continued on as the director ( not officially re-appointed )
- Appointed his wife as Co-director , however his power has lapse as a director
Fact : Weinstock went to court and seek the court to have him validated as a director so that
his wife could be appointed as co-director → prior to dispute with Beck

Rule : S 1322 (4) → section allows the court to tidy up the failure and to do some procedure
properly and then then get to the substance of the dispute

Restriction on member decision making

- 2 types of shareholders : (i) Majority (ii) Minority
- Members exercise voting rights ( self interest ) ; Limits → ​Equitable Limitation
** ⅘ persons agree to change a constitution, one person disagrees. Hence, the 80% who
agrees are the majority shareholders // 20% is the minority shareholders

- Proprietary company : Hard for minority shareholders to sell their shares

Do the facts involve a decision by the majority of members that harms the minority?

Rules applies differently :

a) Case involving constitutional amendment
b) Cae not involving constitutional amendment

Case : Not changing the constitution

 - It is open for shareholders to forgive the directors for a breach of their duty (
Director may have personal interest/ gain in the transaction )

“Steal as directors and forgive themselves as shareholders ( directors on the board are the
majority shareholders )”
- Disadvantage to minority : Breach of Equitable Limitation

Biala V Mallina Holdings

- Majority unwilling to sue where they are the alleged wrongdoers

Menier v Hooper’s Telegraph Works

- Outsider took the company’s property where the members vote not to sue the
outsider
- Majority shareholder received an advantage → breach of equitable limitation

Changing the constitution :

- Even when s 136 if complied with , amendment may be invalid due to equitable
limitation
- If constitution allows majority shareholders to take away the shares of minority
shareholders → kicking someone out of the company unwillingly
Gambotto v WCP:
- Amendments that expropriate shares → taking away someone’s shares unwillingly
- Other constitutional amendments that give rise to conflict

Gambotto establishes different tests for different amendments : ​Only applicable for
change of constitution for inclusion of expropriation clause
Legal Principles :
Category 1 amendments : Amendments to ​allow expropriation ( Allowing shares to be taken
away ) ​of
- Minority shares or
- Valuable proprietary rights attached to their shares ( Voting and Dividend Rights )
Valid →
- Proper purpose ( Restrictive ) → Advancing WCP’s benefit was not enough instead,
save a company from detriment ( allowed )
- No oppression of minority shareholders

Proper Purpose that is recognisable by the court :

- Prevent harm to the company :
(1) Take away shares of minority shareholder who is competing with the company
(2) Removal of member is necessary to allow company to continue in present business

No oppression :
(1) Procedural fairness - process of alerting shareholder ( full disclosure and
independent valuation )
(2) Substantive fairness - price is fair ( could be above market value to be fair )

Court : Breached the equitable limitation, the constitution amendment did not go through
because the change in constitution does NOT save the company from detriment rather its
sole purpose is to benefit IEL

Category 2 Amendments
If constitutional amendments ​did not involve inserting an expropriation clause
- Other amendments involving conflict of interest
- Change of quorum or other possible “ways” to change the constitution
Only valid if :
(1) Done for a company purpose
(2) No oppression of minority shareholders
● Other amendments are not breaching the equitable limitation if : done for a
company purpose / no oppression of minority shareholders
Lecture 5

Transacting by companies

Corporate Capacity​ → ARTIFICIAL LEGAL HUMAN

- S 124​ : Companies have the capacity to do most things a natural person can
do, and some additional things, including :
(1) Issuing shares
(2) Anything that is authorised to do by any other law
- Companies have separate legal entity to make contracts in its own name

Objects clause : A clause set-up describing what the company needs to do

(Statement of Purpose )

- S 125​ : Constitution may limit power or object ( Purpose of the company ) ,

that statement does not invalidate contracts made with 3rd parties. *
contract with outsider
- Internal remedies : Action against directors for acting improper purpose

Company Contracting
- How do companies enter into contracts?
(1) Contract directly - board decision, contract executed by people eg directors
or senior officers → Major building contract
(2) Contracts indirectly through an agent
- Eg : Coles, entering into 100s of contracts with outsiders ( employment
contracts, supplier contracts )
- Not a board member present for executing contratcs

- Contract is valid, regardless of which way it is made

● Contract is made with authority ( Shareholders and B.O.D ) / BOD delegating
power to executives and officers
Enforcing a defective contract
- Defect :
(1) Lack of actual authority to make contract : Person who makes , lack authority
to make it
(2) Defect in procedures : Wrong person signs

- Company denies that is bound by contract - outsider wants to enforce it

Policy issue ( IN FAVOUR OF OUTSIDER ) : Need to balance the competing interests

of
1. Outsiders dealing with companies
2. Innocent shareholders and creditors of companies

● If outsider is not innocent and deserving, hence it will be in favour of

company and innocent shareholders

Contracting Directly
- S 123 : Common seal
- 3 ways:
(1) S 127 (2) : Execute the document ​with ​seal, and necessary witnesses
(2) S 127 (1) : Execute the document ​without​ seal, ​signed as required

- S127 (overall ) : Requires 2 signatures → company director & company

secretary

Company Contracting through an agent :​ s 126

- 3 parties :
(1) 1st party → Company itself (Principal) : wants the contract made
(2) 2nd party → Agent : Makes the contract on the company’s behalf with an
outsider
(3) 3rd party → Outsider

● Contract between principal and 3rd party

 ● Bind principal : Agent needs authority → 2 authority :
(1) Actual authority : Express or implied
(2) Apparent authority

Actual Authority
Eg : The actual authority ( Max amount that can reached is 10,000,000 )
Express ( Written/ Set out )
→ Said in some way <actual>
- Principal gives agent real authority → arise from the provision : S 198 A
( BOD actual authority on behalf of the company to do deals )
- Any deal above 10,000,000 has to be approved by shareholders

- Express actual authority : BOD delegates and down the chain

Implied Actual
- S 198 C : ​Power delegated from the BOD to the Managing Director
- Implied by the granting of the title <big role>
- B.O.D does not tell the little details * given a title, there is an implication
(assumed that the person has the power to carry out certain task )
- Actual authority even when it is not spelt out : Appointing someone to a
certain position
- Different company officers have different levels of implied authority

● Possible to limit implied actual authority ( Do not open new shops without
BOD approval )
● Express actual + Implied (Role ) Actual - Express (Expressly told what not to
do ) limitations/restrictions = Actual authority

I.A.A ( Implied actual authority ) by acquiescence < forgave someone for exceeding
authority > → ‘ratifying’ past exceeding authorities ​(the event has occurred several
times and the company did not take action )
● Because the company has allowed the person to do it (repetitively) → extend
the person IAA
Officers’ IAA
- Applies to executive officers ( people who work day-to-day in the operations
)
- Nature of the person’s own job : within their own usual scope of the IAA
- Single director has no IAA → single director of a one director board ( no
authority )
- Single director of a multi number board → IAA is the collective things as a
board ( eg : Organise AGM ) // collectively make board decisions
- Chair of the board - Same type of IAA as the single director ( NO IAA )

Company secretary → IAA of administrative matters

Defective contracts made by agents

- Contracts made through an agent may be defective :
(1) No express actual authority ( written out or said in some way )

(2) Has express actual authority that is too narrow for this contract
- Purchase of land up to 1 mil
- Bought within 900,000 : Contract is binding
- Bought land for 1.2 mil : EAA of 1 mil only
- Not big enough to cover contract made

(3) No implied actual authority : because of role played

Common law rules to assist outsider (1)

Scenario : Company claims contract made out of authority, but the outsider wants
the contract to be enforced

- Apparent authority : Appearance of authority

- Looks that the person has authority but they dont, no actual authority
 - Arises when the principal has not in any way given the agent the actual
authority to make the contract
Law protect the outsider when 3 elements are satisfied :
(1) Representation of authority by the principal
→ “ I am sending my agent to you to buy the land “ (Did not disclose to the 3rd party
regarding the upper limit ) → Agent made contract of 1.2 mil

Was there representation?

Yes
Did the 3rd party on representation?
Yes

Who is more innocent?

- The principal is less innocent because the principal could have told the 3rd
party about the upper limit but chose not to
- Innocent outsider made transaction believing agent has unlimited power
- If agent had told the outsider, the outsider will be less innocent
(2) By someone with actual authority : Apparent authority is not enough
(3) On which the outsider relied → outsider must be “induced”

● 3 elements must be satisfied

Pacific Carriers v BNP Paribas

- Picture presented
- PC : company needed doc to be verified by the bank
- Doc loan officer - verify shipping contracts, documented guarantee by the
stamp
- Holding out : Given appearance of authority through the office
● The bank was held to the obligation ( BNP Paribas ) because they had set out
the environment to “ show “ that she has authority

CL Rule to assist outsiders

 - Indoor Management Rule : allow outsider to assume what is done ( behind
close doors ) is done properly
- IMR : Rule holds that parties dealing with a corporation, acting in good faith
and without knowledge of any irregularity , are entitled to assume that a
corporation‘s internal policies and proceedings have been followed and
complied with
Outsider can assume​ that :
(1) No procedural defects in the appointment of directors
(2) Board meetings properly called and held
(3) Any board or general meeting approval required under constitution/
replaceable rules has been obtained
● Done by company behind closed doors
Lose right to rely on the rule :
- Actual knowledge of lack of authority ( Know that the procedures were not
followed correctly )
- Outsider was put on inquiry : Fail to ask questions that should have been made

Royal British Bank v Turquand

- Does the Bank know that the director did not have prior approval ? No
- They put on inquiry about the transaction and the bank loses it right to rely
on the indoor management rule

Common Law Holding out

- P wants to buy land from 3P via an A
- P only wants to pay max of 1 mil, but doesn’t tell 3P the upper limit
- P tells 3P : agent coming to negotiate and buy land
- P tells A : buy the land and dont pay more than 1 mil
- A signs a contract with 3P for 1.2 mil

● P is bounded because there was a ​representation of authority​ by the

principal → P tells 3P that the agent is coming to negotiate and buy the land
● By someone with actual authority : ( Apparent authority is not enough ) → P
tells A to by the land not more than 1 mil
 ● On which outsider is relied ( Outsider must be induced ) → P tells 3P that the
agent will buy land
Hence, the contract is binding for P

Statutory Assumptions
- If outsider can enforce contract based on the statute and not the common
law : the outsider WIN
- S 128​ : Entitlement to make assumptions
(1) Person ( Outsider ) is entitled to make the assumptions in s 129 in relations
to dealings with that company.
(3) Outsider can still WIN, even if the agent acts fraudulently or forges a
document

- S129 (1)​ : IMR → outsider can assume that board has been properly
appointed etc
→ If constitution states that shareholder approval is needed when the transaction
surpasses the upper limit, the outsider is entitled to assume that the approval was
given

- S 129 (2) ​: person may assume that ​anyone who appears​, from i​nformation
provided by the company​ that is available to the public from ASIC, to ​be a
director of a company/ secretary
→ Named by ASIC but error in appointment : Outsider can assume that the director
is properly appointed
Outsider assume :
a)** Outsider assume proper appointment
b) Authority to exercise the powers as directors & secretaries and perform the
duties < Does not involve contract making powers >

Directors and secretaries duties are limited : Mainly towards the signing of documents

Powers of directors are fairly limited : Collectively make decisions and contribute in a board
meeting
- S 129 (3)​ : Outsider may assume that anyone who is held out ( Person with
actual authority ) by the company to be an officer or agent of the company
→ Positional holding out : Relevant to position only
→ a ) Assume that the manager is duly appointed ( on biz card, phone number and
office )
→ b ) Outsider can assume that the held out officer has authority to exercie the
powers and perform the duties customarily exercised or performed by that kind of
officer or agent of a similar company

Stage 1 : What are the customarily powers of that kind of officer of a similar
company
Stage 2 : Compare what was done and imaginary powers ( was the exercise within
the list of customarily powers ?)

● Is contract common for the position?

If we dont agree ( gut feeling ) → eventhough the outsider was appointed as the
CEO/COO, he was not exercising the powers customarily exercised by that kind of
officer of a similar company

“If it looks alright to the outsider, it is alright”

Eg : Marketing manager for Coles → Large budget, assume that it was a usual type
of thing?
Eg : … for small company → gain suspicion → contract is not enforceable
 - ​ S 129 (4) :
- A person may assume that officers and agents of the company properly
perform duties to the company
- Does not matter if there was conflict of interests that occured

- S 129 (5) :
- No company seal
Based on 128 (3), even if the contracts have been sealed --> the signatories are forged -->
contract is still enforceable
- S 129 (6):
- Company seal
FOR 129 (5) (6)
● Two names with directors → Due execution
● False names are still enforceable
● If manager and director → Not enforceable because it has to be director +
director // director + company secretary

128 (4) Actual suspicions​ : Outsider loses the right to make the assumption when
the there was errors in the contract → result : the contract is invalid

Knowledge of the requirement of the constitution

Knowledge that the law has not been complied with
----> Outsider knows that the shareholder votes is required , required shareholder
votes did not take place ( outsider did not know ) → Contract is Valid

Knew it is required, time period is short, suspect it took place?

Actual suspicion → Outsider has evidence of email discussion that somethings
suspicious took place < Outsider suspect that there is no proper approval > , if
outsider suspected then the outsider will win
--> If outsider knows that the person does not have actual authority, the outsider
loss

Lecture 6
Company’s directors and Officer’s Duties

Directors’ duties
1. Core obligations
- Care and diligence
- Loyalty and good faith (Best interest of the company)

2. Statutory versions
- Statutory liability → Gives Asic the right to take action against directors
3. Can action be brought under the Corporations Act?
- Must use cases
- Use facts and rules
- Draw conclusions

4. General law ( Case law ) Duties

Duties are owed by :
a) Directors
b) Senior executive officers
- In fiduciary relationship ( Company is helpless to resists ) with the company
→ based on the power they exercise and the vulnerability of the company to
their wrongful actions
c) Duties are owed to ?
(1) Company
(2) Duty may be owed to an individual shareholder : Brunninghausen v
Galvanics
Facts : B owed ⅚ of shares, Galvanics ⅙ → B bought G’s shares without telling him his
true intentions ( Sale of company for a good price )
Who owes statutory duties?
- Apply to : De facto ( not properly appointed but act as directors ) and
Shadow directors ( wishes and instructions whereby the board is
accustomed to act )
- S 9 : Apply to officers ( people who have substantial influence over the
company & directors )
- S 182 & S 183 : Duties imposed on employees

Enforces the duties?

Stat duties
- Can be enforced by ASIC
- Company can seek compensation
General law duties are enforced by the company

Why have both general law and statute?

- Statute allows ASIC to be involved in enforcement
- Different remedies available under statute and general law

Consequences of breach of the statutory duties?

- Statutory duties are “ civil penalty provisions” → cannot send someone to
jail, but there are still other ways to punish them ( Fines, disqualification )
- Civil penalty < Civil & Criminal >
- If ASIC is in charge of the case → go to court for declaration of contravention
● ​S 1317 G​ → Court : Pecuniary penalty up to 200,000
● S 206 C ​: Disqualification (Banning) Order
● S 1317 H ​→ Compensation to the company < company can seek
compensation >
- Criminal consequences
● Breach of duty of care : None
● Contravention ( Law breakking ) → offence : criminal penalty of prison
and/or a fine : $420, 000
● Criminal equivalence : S 184​ : Intentional dishonesty or recklessness : Yes

Schedule 3 Penalties
 - Expressed in penalty units
- 210 dollars per unit

Duty of care, skill and diligence

- Sources of duty : General law negligence cases < major source of companys’
right to bring action against directors >
- S 180 (1) : Care & diligence
- Senior management - enter into contract of employment with the company (
Can be sued in breach )

- A director / officer breach duty → negligent

- S 180 (1) : A director or other officer of a corporation - exercise power and
duties with the degree of care and diligence that a reasonable person would
exercise
- What a reasonable person would think is reasonable?
- < Reasonable > : Objective test

2 subjective test : - s 180 (1)

a) Corporation circumstances ( The worst the company’s circumstances, the
more the company has to do )
b) Title & responsibilities? * Other responsibilities

The standard required of director X is the care that

- A reasonable person
- Doing X’s job
- In X’s company
Would exercise ( Objective test )

What do directors have to do?

Daniels v AWA Ltd

Requirements from ^ : ​Directors must < Director Responsibility >
a) Obtain basic understanding of their company’s business
 b) Keep informed about and monitor company’s activities
c) Regularly attend board meetings
d) Monitor company’s financial position

ASIC v Vines

- Directors with special skills are held to the standard of a person professing to
have those skills
- More involved in company’s business, the more is expected of the director

Executive director’s greater involvement in the business of company → leads to an

expectation of greater knowledge, focus and awareness

Delegation and reliance defences

- S 198 D ​: Director may delegate any of their powers to any person , unless
constitution restricts delegation
- S198 C : Allows board to delegate to managing director

→ If delegate is negligent, the board will be liable for the deligate’s actions
● Directors together allocate the power, liability is held by only ​a​ director

The director would not be held liable if the director believed on reasonable grounds
the delegate would exercise the power in conformity with duties imposed on
directors and … →
S 190 → Checklist : Delegates’ reliance and competence : → director believed
a) On reasonable grounds
b) In good faith
c) After making proper inquiry if the circumstances indicated the need for
inquiry
● We need to believe on reasonable grounds, and in good faith that the
delegate is reliable and competent
 ● If all elements are satisfied, then the director is not responsible for any
breach of duty

Defences :
S 189 : Reliance of information defence

- If director relies on information, professional or expert advice given by

employees →
Reliance made in
(1) Good faith
(2) After making ​independent assessment of the information or advice​, having
regard to the director’s knowledge of the corporation and the complexity of
the structure and operations of the corporation
Situation :
● Report from accountant or professional → information was from a
professional but the director was not able to believe on competent grounds if
the report was produced based on expert competence

Breach of duty of care : Four Steps

1. What would a reasonable person do in this type of scenario?
2. Delegation issue
3. Reliance on information provided by someone ( Expert/ Professional ) →
Establish or Dismiss the Reliance
4. Punishment for the Duty

S 189 : Good faith and independent assessment

ASIC V Healey

- Centro Case : Centro shopping centre → US retail market - did badly in GFC
- Debts were listed as NCA instead of CA
- Was not true and fair view → Directors of company were sued for negligence
Step 1 : Did they do what a reasonable person would do in a company?

Based on : Daniels v AWA Ltd

Requirements from ^ : ​Directors must < Director Responsibility >
e) Obtain basic understanding of their company’s business
f) Keep informed about and monitor company’s activities
g) Regularly attend board meetings
h) Monitor company’s financial position

- Believed on reasonable grounds that the experts (PWC) were accurate in

their information
Step 2 : S 189 Reliance ( Good faith or independent assessment? )
- No one was cheating ( Good faith )
- Reliance defence failed​ : None of the executives could make an independent
assessment on the financial reports
Duty of care : Directors need to understand acc information better, to be able to ask
questions

ASIC V Adler

Facts :
- Rodney Adler , investor of HIH insurance. HIH was not doing well
- Fedora ( CFO of Adler ) , Adler was non-executive director and Williams (
CEO )
- HIH stocks were expected to increase
ASIC
 - Material prejudice to company’s interest : When HIH gave a loan to PEE w/o
proper documentation → did not yield good return for HIH
Overlapping duties
Adler , breach :
(1) S 180, S 181
** One lot of bad behaviour → multiple breaches of the act

Defence : To avoid criminal or civil liability

Business Judgement Rule ( BJR ) - S 180 (2)

- Outcome of AWA → Give rise to director liability

- Designed to protect D’s from negligence liability where properly made
decisions end badly
** Protect directors

- Only applicable when director has met s 180 ** Core and Diligence
- Not able to forgive act of laziness → business judgement that turned out bad
( Forgivable )
- B JR is applicable when :-
(1) Good faith and for a proper purpose :​Proper Purpose : Maximising Shareholder
Wealth and Expand Co Operations, Protect Co from risk
(2) No material personal interest in subject matter of judgement ( Nothing in it
for you for making the decision )
(3) Inform themselves ** < Expert reports and business plans → questionable
prior to coming up with it >
(4) Rationally believe the judgement is in the best interests of the company

Conclusion : ​If we have satisfied (X) all, then forgiven for breach of duty of care

ASIC V RICH
- BJR applicable
Insolvent trading
- S 588 G ​: Directors have a duty to prevent their company incurring debts
when the company is insolvent or would become insolvent
- Employees and trade creditors may not be paid for insolvent trading

- Not fair for “new people” to risk lost when the directors already suspect that
the company may not be able to pay its existing bills

Duty is owed by ‘directors’ → de facto and shadow directors

Standard Charteerd Bank v Antico

- Shadow director : Liable for insolvent trading of the company

Checklists :

S 588 G :
a) Person must be a director of the company ( Does not cover officers and
employees )
→ Have to be director when the company incurs the debt
b) The company has to be insolvent in that moment ( when incurring the debt )
/ becomes insolvent by incurring the debt
c) At time the company incurring the debt, reasonable grounds suspecting that
the company is insolvent, or would so become insolvent

● Only when the above is satisfied, we look at ..

S 588 G (1A)​: impose liability → only when the above is present
- Debt : Deeming behaviours < Paying dividend>
- < Share capital >
S 588 F (b) ​- < Uncommercial transaction > → Selling asset worth 10,000 to
director for 10
Insolvent Trading - 2
S 95 A :​ Company incurs the debt when it is insolvent

NOTE :
1. Time of incurring debt / Time debt has to be paid
- At time incur debt, company has to be solvent
- Is company able to pay debts as and when it is due?
- 50,000 mortgage , can pay off when I have to pay for it → Dont have to have
every dollar today for tomorrow

Have the money at the time they are due and payable S 588 G → Insolvent?

(1) Company has to be insolvent

(2) Reasonable grounds for suspecting insolvency ( at time incurring in debt )

Is the liability only on the director who incurs the debt?

- It is on ALL of directors, not just on the director who incurred the debt

S 588 G (2)​ Liabilities imposed :

a) Person aware at time incur → reasonable grounds that company may not be
able to pay the debt < suspecting that company may not be able to pay the
debt >
b) Reasonable person in a like position in a company would be aware

S 588 G (2) : Liability Imposed where :

The director was aware that there were reasonable grounds for suspecting
insolvency ( Subjective test )

A reasonable person doing that director’s job in that company would have been
aware that there were reasonable grounds for suspecting insolvency ( Objective
 Test )
What does ‘ incur a debt’ mean?

Note : The objective is to stop directors from incurring more new debts when the
company cannot pay the current ones
The debt -
(1) Must be for a specific amount
(2) Must be incurred voluntarily by company

When does company incur debt?

(1) Buys something but doesnt pay for it
(2) Gets services performed but doesn’t pay yet

Some actions are Deemed to be debts ( Not true debts )

S 588 G 1 (A) :
- Declaring a dividend
- Uncommercial transactions
- Share capital transactions

Defences : S 588 H
- Defence not needed unless a breach of S 588 G
S 588 H (2) : It is a defence if it is proved that, at the time when the debt was
incurred, the person has reasonable grounds to expect, and did expect, that the
company was solvent at that time​ and would remain solvent ​even if it incurred that
debt or any other debts incurred at that time

- Harder to “expect” → Metropolitan Fire Systems v Miller : Ignorance of

company finances is no excuse

Checklist : (1) Reasonable Grounds

(2) Expect?
 - Thoroughly qualified CFO provide audited accounts to the board → co in
good financial position

S 588 H (3) : Expect solvency? Delegation & reliance on competent and reliable
person
- Person did believe that a competent and reliable person was responsible for
providing the person adequate information about whether the company was
solvent
- Person has to fulfill responsibility

● Directors have to be actively asked → receive financial information that the

co is not insolvent
● “Person” constantly overseas → not good enough

S 588 H (4) : Illness , did not take part in management

Case : Deputy Commissioner of Taxation v Clark
→ Clark liable as 2nd director for signing

Eg : Q about Insolvent Trading

Step 1 : Breach : Liable under S 588G
Step 2 : Defence : Forgiven under S 588 H

Defences and Consequences

Directors took all reasonable steps to prevent the company from incurring debt :
- S 588 H (5) + S S588 H (6)
S 588 H ( 5) ​: It is a defence if it is proved that person took all reasonable steps to
prevent the company from incurring the debt.
S 588 H (6)​ : Any action the person took with a view to appointing an admin of the
Co, when the action was taken, results of the action
Consequences :
(1) Civil penalty breach →
- Pecuniary penalty, disqualification and compensation
- S 588 M​ : Liquidator can seek for compensation
- S 588 S & S 588 T​ : Unsecured creditor can seek compensation
(2) ​588 G (3) ​: Criminal Offence