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Tutorial 4 Question 1 Zee, Ali, Marie, Catalina and Dong decide to form a company ‘Expert Pty Ltd’. They also decide to be the only shareholders and directors of the company. Zee and Ali are in charge of completing the registration of the company. Marie is not involved in the process however she is set to get a $30 000 from the creation of the company. Catalina and Dong were put in charge of finding premises to run the business from, however they had particular instructions not to sign any lease without the approval of Zee and Ali. After a month of looking around, Dong and Catalina find the perfect premises and they become very excited. They attempted to call Zee and Ali to advise them about it. However they discover that Zee and Ali are overseas. Worried that they may loose the deal, Dong and Catalina sign the lease with the owner (Jacob) for and on behalf of ‘Expert Pty Ltd’ and as agents of Zee, Ali and Marie. The lease is for a period of four years. The company ‘Expert Pty Ltd’ is registered after one week from the signing of the lease. However, on the first meeting of directors, a resolution is passed not to accept the contract because the board of director considered that they could lease similar premises at a cheaper price. a- Who are the promoters in this case? Answer hints: Zee, Ali, Catalina and Dong are the active promoters because they took part in the formation of the company. ( Twycross v Grant) Marie though did not take part in the formation of the company but she left the formation of the company with the hands of Zee, Ali, Catalina and Dong upon the understanding that she will receive $30,000 will be a passive promoter. ( Tracey v Mandalay Pty Ltd) b- Advise Jacob on the liability of the different parties. This question deals with a pre-registration contract as the contract with Jacob was signed by Dong and Catalina before the incorporation of the company. Since this contract was not ratified by the company after its incorporation Dong and Catalina would be personally liable under section 131(2). c- Would the answer to Question b be different if Expert Pty Ltd decided to ratify the contract after 1 month of the company’s creation? If the contract is ratified by the company after its incorporation either within an agreed time or in absence of an agreed time within a reasonable time then the company would be bound by the contract and not the people who signed the contract. (s131(1)). However, if the court considers delay of one month in ratifying the contract was not a reasonable time then Catalina and Dong would still remain liable under the contract. Question 2 Alf and Sayed decided to register a company, ‘Fault Pty Ltd’. Sayed was in charge of registering the company while Alf was not involved in the formation of the company but he was going to receive $50,000 each from the creation of the company.

Before the company is registered, Sayed bought, on behalf of Fault Pty Ltd, a clothing business from Greedy Ltd. After the company was registered the company ratified the contract within a reasonable amount of time. A couple of months later, the board of directors discovered that Greedy Ltd was controlled by Sayed and Alf (who each owned 50% of the shares of Greedy Ltd). This information was not disclosed to the board of directors when the contract was ratified. What action if any can the board of directors take on behalf of the company? In the above question since Fault Pty Ltd ratified the contract (buying the clothing business from Greedy Ltd) within a reasonable time Fault would be bound by the contract entered by Alf and Sayed before its incorporation. (s131(1)) However, Sayed was the active promoter (Twycross v Grant) and Alf was a passive promoter. (Tracey v Mandalay) Both these promoters have their fiduciary duties to disclose their personal material interest (Erlanger v New Sombrero Phosphate Co) in the Greedy Ltd. Though the company ratified the contract but the company can now sue the promoters for breach of their fiduciary duty to disclose material personal interest in the contract. The company can seek to rescind the contract despite earlier ratification. (Erlanger v New Sombrero Phosphate Co) Question 3 Architect Pty Ltd was registered in 2005. Mario, Lucas and Samantha are its only shareholders. Mario is the company’s director. Lucas is the company secretary. Samantha was married to Mario, and when the company was created the three shareholders included the following clause in the company’s constitution: “Samantha was to remain as Architect Pty Ltd’s accountant and cannot be removed from this position without proven misconduct.” In 2007, after marriage difficulties, Mario and Samantha got divorced. Samantha has just received a letter from Architect Pt Ltd stating that her services were no longer required. ADVISE Samantha on whether she can prevent the company from terminating her services as an accountant in this way. She especially wants to know if the company’s constitution would protect her. Answer this question by referring to Corporations Act 2001 and decided cases. This question deals with the legal effect of the internal governance rule. According to s140(1) company’s constitution is a contract between the company and an individual shareholder, ie Samantha. Despite the fact that “Samantha was to remain as Architect Pty Ltd’s accountant and cannot be removed from this position without proven misconduct” the company terminated her job without any proven misconduct. The issue is whether Samantha can stop the company from removing her from her position? Though s140(1) states that the company’s constitution is a contract between the company and individual shareholder, Samantha, but the company’s constitution is only a contract involving right of a person in the capacity as a member not in any other capacity. In other words, the constitution does not create a legal relationship between the company and outsiders. (Eley v Positive Government Security Life Assurance Co). Her right as an employee is not protected by the constitution. Therefore, she cannot stop the company from terminating her job based on what was written in the constitution.

Question 4 Jack is a shareholder in Stradford Ltd and he owns 80% of the shares of the company. He calls for a members meeting to amend the constitution of the company. The clause he wishes to include in the constitution is the following: ‘Any shareholder who owns less than 21% of the shares of the company is required to pay $10,000 to the company.’ A special resolution is passed in relation to the change of the constitution. George who own 5% of the shares of the company does not wish to pay such an amount and never agreed to it. Advise George on the matter. A company can amend its constitution by a special resolution (ie. a resolution to be passed by at least 75% of the members). (s 136(2)). However, there are a few restrictions imposed on the amendment. One of those restrictions is contained in s140(2). A member is not bound by any amendment unless a member agrees in writing in regards to 3 things mentioned in this section. An amendment requiring a member to contribute more money will not be valid unless the member agrees in wring. (Ding v Sylvania Waterways Ltd) Since George does not wish to pay additional $10,000 this resolution is not binding on him. Question 5 In 1985, Rail Ltd’s constitution had the following clause: ‘Rail Ltd has been formed to make, sell and hire railway carriages and wagons.’ In 2009, the Board of directors was discussing the possibility of entering into a contract for the financing and the construction of a new type of car that may revolutionize the car industry. One of the directors, Wayne, was concerned that this plan may breach the company’s constitution. The directors’ brushed Wayne’s concerns aside noting that a company’s constitution is now viewed as an archaic and largely irrelevant document. Subsequently a unanimous resolution was passed authorising this new business plan for the company and contracts were signed with a number of dealers to provide parts for the new cars. When the members of the company discovered what happened, they were not happy. The company’s solicitor reassured the members that everything would be fine, by stating that the contracts were not binding because they do not comply with the object clause of the constitution. Advise on the following: a) Outline the effect of a company’s constitution. [you must refer to the Corporations Act} Are the directors, apart from Wayne, correct in saying that a company’s constitution is now irrelevant? This question deals with s125(2) which effectively removes the concept of ultra-vires. (Read chapter 6.2 and 6.3.)The question raises issues dealt with by s125(2) and s 140(1)....