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BLAW2006 Tutorial Questions Topic 3

Company Law for Business (Curtin University)

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Company Law for Business BLAW2006

TUTORIAL QUESTIONS

TUTORIAL 3 (TOPIC 3)
QUESTION ONE
Mary is a sole trader and wishes to expand her business. She is considering incorporating a
proprietary company. She wants the company to be named after the famous Australian cricket
player “Sir Donald Bradman”. Therefore she intends to call her company Donald Bradman
Pty Ltd. If this is not possible, then she is happy that the company does not have any real
name.
a) Outline briefly the procedure for registering a proprietary company. Download the
application form to register the company from the ASIC website and complete it with
hypothetical information.
S117, form 201. Registration -> certify the company becomes separate legal person ->
artificial person S119.

Company is formed thru registration.

b) What are the advantages of Mary’s company being classified as a small proprietary
company?
S45A, specifically small proprietary company generally having financial obligations
reduced.
2 of the following criteria:
- Revenue < 25 million
- Assets < 12.5million
- < 50 employees

S301 & S292 – requirements of auditor and financial reporting.

c) Will Mary be able to register the company with the name “Donald Bradman Pty Ltd”
and if not, is it possible for the company to have no name?
Page 3-3, Donald Bradman – protected name. S147 – identical and unacceptable names.
Can use ACN as its name if it wishes S148.
QUESTION TWO
Wizard Pty Ltd is a company without a constitution.
Mr Henry Potter owns 1000 shares in the company and attends a meeting of members. The
chairperson of the meeting is Wendy Wizard. Two issues have arisen:

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(i) Henry challenges Wendy’s right to be the chairperson of the members’ meeting and
claims that the members should be able to appoint anyone they chose. Wendy rejects
Harry’s claim.
S134, 135, 136.
S141 -> lists of Replaceable Rules -> item 25 (S249U – directors elect chair meetings if
directors don’t, members can do it)
In this case, we can assume that directors have done it.

(ii) Henry claims that the members have power to remove the directors but Wendy asserts
that the members do not have such a power.
Determine who is correct on each of these matters.
[Clue: Commence by examining s141 to ascertain the appropriate rule]
It is a proprietary company.
S203C – members can remove directors by special resolution unless the RR is replaced. It
provides that a proprietary company may by resolution remove a director from the office.

QUESTION THREE
Spears Ltd has a constitution that does not repeal any of the replaceable rules of the
Corporations Act 2001 (Cth) but does provide for two additional matters:
(i) an objects clause provides that “the company’s activities are restricted to the
recording and publishing of music”; and
(ii) another clause provides: “Jackson White is to be the company's Senior Music
Producer at a salary of $200,000 per year”.
The directors of Spears Ltd have decided to ignore the constitution and to carry out the
following actions:
 to execute a contract with Little Brother Pty Ltd for the release of films on DVD;
 to insert into the company’s constitution a clause that John will be the company’s
permanent director; and
 to appoint Britney Lance as Senior Music Producer.
Required:

(a) Spears Ltd loses money under its agreement with Little Brother Pty Ltd and refuses to
pay the amount owing, arguing that it has no legal capacity to release films and that
Little Brother legally would have known about this limitations from Spears Ltd’s
constitution.
Advise Little Brother Pty Ltd.
- Discuss the meaning and use of objects clauses in a constitution. Apart from NL
companies it is optional for all others as to whether they have an objects clause in
their constitution or not. Obviously all companies that rely solely on the RRs of the
CA do not have an objects clause.
- A company has the legal capacity of an individual (s124(1)) and an objects clause
does not diminish its contractual capacity. This is stated in s125. Nevertheless a
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company should comply with its constitution and although the rights of an outsider
are protected in the event of an ultra vires act, those managing the company (the
directors) could expose themselves to damages should the ultra vires act result in
detriment to the company.
- Even if there is no detriment, members could seek an injunction to compel the
directors to conduct the affairs of the company in a constitutional manner.
- As Spears Ltd is a public company its constitution would have been lodged [s136(5)]
and the objects clause would have available to any party to inspect. However, the
doctrine of constructive notice is abolished over such lodgments with ASIC
[s130(1)]. Further, even if Little Brother has actual knowledge of the objects clause
and is aware of the breach by Spears Ltd, it does not diminish the legal capacity of
Spears Ltd provided by s124(1) and supported by s125. The contract will be
enforceable.
 Parliament said that company no need to follow object clause because S124 stated
that company has power of individuals.

(b) Can the directors amend the constitution? What is the proper process? If the
amendment is correctly passed, will the shareholders be able to remove John as a
director? [Clue: Examine s203C and 203D to ascertain the appropriate answer]
• The proper process to amend a constitution is covered by s136(2).
• Meaning of a “special resolution” and that only members in general meeting (not
directors) pass such resolutions.
• Understand that the company cannot create a constitution that changes the CA
that is not a replaceable rule. The company cannot create a rule appointing John
as a permanent director as S203D is not a replaceable rule.

(c) Jackson White writes to Spears Ltd demanding his job back but is told he has no
contract. He buys some shares in Spears Ltd and writes again, this time claiming he
has a contract.
Advise Spears Ltd.
[Note: You do not have to consider whether the directors have breached their duties
when answering this question.]
• Explain the statutory contract of s140(1). Note the only parties covered are the
company, directors and members. Any other person does not have standing to
enforce a rule in the company’s constitution, see Forbes v NSW Trotting and the
principle of privity of contract.
• The reference to “member” in s140(1) is to a person in their capacity as a
member. It does not refer to the person in any other capacity they may have, such
as an employee Eley v Positive Government Security Life Assoc. Thus a member
can only enforce a rule of a constitution that applies to a membership matter. If it
refers to another matter, it is inappropriately placed in the constitution and is
unenforceable.
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• Here, Jackson would not be a party to the statutory contract whilst only an
employee. After becoming a member he would be a party to the constitution but
the clause he wishes to enforce is a non-membership matter and is unenforceable.

QUESTION FOUR
Steve has decided to register a company to grow grapes and produce wine. He instructs his
solicitor to draft a constitution for the proposed company. Whilst waiting for the solicitor to
complete the work and before the company is registered, Steve meets a landowner who is
prepared to lease suitable land to the proposed company. Steve has to act quickly to secure
the land and so he signs a 20 year lease on behalf of the proposed company.
The company is later registered and Steve’s cousins are the first directors. The company has
issued ten shares, two held by Steve and eight held by Bob.
The company employs Steve as the manager of the wine business for an amount of $200,000
per annum. The current remuneration for managers of similar businesses is $100,000 per
annum.
At the first directors’ meeting the ratification of Steve’s lease is considered. More suitable
land has now become available at a lower price.
Six months go by and Bob becomes concerned about Steve’s salary being very high.

Required:

(a) How does corporate law classify the role undertaken by Steve leading up to the
registration of the company? What are the duties that such a person owes and to whom
are these duties owed? Has Steve breached these duties?

The term "promoter" is not defined in the Corporations Act 2001 (Cth) but in common law.
In Twycross v Grant, a promoter is stated as “one who undertakes to form a company with
reference to a given project and to set it going, and who takes the necessary steps to
accomplish that purpose.” Dick is a promoter as he is the party responsible for starting up
the company.

(b) What is the effect on Steve and on the company if the directors decide not to ratify the
lease signed by Steve?

Under s131 if the company does not ratify the pre-registration contract within a reasonable
time, the promoter/person who enters into the pre-registration contract is liable.

The other directors are quite correct to make their decision in the best interests of the
company and not to lose their discretion simply to support Steve. The company’s refusal to
ratify the lease leaves Steve personally liable to the owner of the property: see s131(2) Steve

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could not have been an agent of the company when he signed the lease as the company did
not exist at that time (it was not yet registered).
• [Note that ratification requires a positive act demonstrating the company adoption or
confirmation of the pre-registration contract – it is not limited to the passing of a
resolution by the BoD. For example, if the company had already started to use the
land or paid an amount of rent, this would likely constitute ratification.]
• Steve cannot claim a right of indemnity against the company: s132(2). The court has
discretion under s131(3) to “do anything that it considers appropriate” including
ordering the company (instead of Steve) to pay damages to the landowner.
• Only if the lease agreement contained a clause that terminated the agreement upon
the company failing to ratify the contract, could Steve avoid liability

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