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.
b) What are the advantages of Mary’s company being classified as a small proprietary
company?
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?

s117, s201, s119

Proprietary companies (1) A proprietary company is a company that is registered as, or converts
to, a proprietary company under this Act. Note 1: A proprietary company can be registered under
section 118 or 601BD. A company can convert to a proprietary company under Part 2B.7. Note
2: A proprietary company must: * be limited by shares or be an unlimited company with a share
capital * have no more than 50 non-employee shareholders * not do anything that would require
disclosure to investors under Chapter 6D (except in limited circumstances). (see section 113).
Small proprietary company (2) A proprietary company is a small proprietary company for a
financial year if it satisfies at least 2 of the following paragraphs: (a) the consolidated gross
operating revenue for the financial year of the company and the entities it controls (if any) is less
than $10 million; (b) the value of the consolidated gross assets at the end of the financial year of
the company and the entities it controls (if any) is less than $5 million; (c) the company and the
entities it controls (if any) have fewer than 50 employees at the end of the financial year. Note: A
small proprietary company generally has reduced financial reporting requirements (see
subsection 292(2)).
In Mary's case, the advantage would cover the financial reporting requirements to exempt from
auditing s292
Unless, ASIC requires auditing, Mary's company is a subsidiary of a foreign company or 5% of
members want it.
A company can convert to a proprietary company under Part 2B.7. Note 2: A proprietary
company
Financial, conversion, other reporting
Understand the concept of identical and unacceptable names (S147). Names that imply
connection with the crown or famous or protected names are not acceptable.  A company is not
required to have a specific name.  Although unusual, it can use its ACN as its name if it wishes:
s148.

Company Law for Business BLAW2006

Tutorial Questions – Topic 3
© Curtin Law School - Faculty of Business and Law 1/6
1/6
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:
(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.
(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]
Step 1: Area of law is on internal governance rule for a proprietary company that has no
constitution.

Step 2: s141 - RR

Without a constitution the RRs will apply under s135. Under the “meetings of members” heading
of s141 appears item 25 “chairing meetings of members” s249U.

Explain 198C

RRs203C re removal of directors by members. It provides that a proprietary company may by

resolution remove a director from office

Step 3:

Even if Henry is the member of the company with 1000 shares, the RR has provisions regarding
chairing of meetings that must be followed.

It provides that directors appoint the chairperson Wendy and only if they fail to do so can the
members act. Therefore, Henry cannot appoint unless the directors do not do their job

Wendy’s assertion that members do not have the power to remove directors is incorrect and in
conflict of section 203C of the corporations act which states that it is possible for members of a
proprietary company to remove a director through a resolution.

Under 203C(a), Henry's claim is correct where members have the power to remove the directors.

Special resolution 75% in favour.

Step 4: In conclusion, for a proprietary company with no constitution, Henry is not correct when
he claims that members can appoint anyone as chairperson. However, he is correct when he
claims that members have the power to remove the directors through special resolution.

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”.
Company Law for Business BLAW2006
Tutorial Questions – Topic 3
© Curtin Law School - Faculty of Business and Law 2/6
2/6
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.
Step 1 - Area of law focusing on constitution and the RR Also, members and non
members

Step 2: 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 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.

Step 3: 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.

Step 4: Little Brother can enforce the contract

(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]

Directions cant amend the

consisituon, only S/H can -
section 136!

Company Law for Business BLAW2006

Tutorial Questions – Topic 3
© Curtin Law School - Faculty of Business and Law 3/6
3/6
The company is public, so
once amended has to be sent to
ASIC !
Under 203D they can always
remove directors - ordinary
(50+1)
 Section 136 (2)
 Section 9 (definition of ‘special resolution’)
 Section 136 (5)
 Section 203D

Meaning of a “special resolution” and that only members in general meeting (not directors)
pass such resolutions.

Directions cant amend the consisituon, only S/H can - section 136!
A constitution can be amended (altered) by Special Resolution: at least 21 days notice (28
days for public listed companies) is required and 75% of members (present and entitled
to vote) vote in favour

The company is public, so once amended has to be sent to ASIC !

Under 203D they can always remove directors - ordinary (50+1)
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

Company Law for Business BLAW2006

Tutorial Questions – Topic 3
© Curtin Law School - Faculty of Business and Law 4/6
4/6
 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.

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?

Step 1: law is focusing on the role of promoter and fiduciary duties.

Step 2: 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.”
Promoters owe a fiduciary duty to their proposed company. Following registration and the
appointment of the directors (who also have a fiduciary relationship with the company) the
promoter's fiduciary obligations will continue until all aspects resulting from the formation of the
company have concluded: Twycross v Grant.
The fiduciary relationship is one of utmost good faith. Promoters owe fiduciary duties to the
proposed company including, among others, (i)                 to place the interest of the (proposed)
company ahead of the promoter's personal interest; (ii)               to avoid conflicts of interest;
(iii)             not to make any secret profits and, (iv) to make full disclosure of any interests in
matters involving the company: see  Erlanger v New Sombrero Phosphate Co. To act bona fide
(in good faith) for the benefit of the company; To put the company’s and investors’ interests; Not
to make any secret profits; Not to take up opportunities belonging to the company; Not to
disclose confidential information and To disclose relevant interests.

Step 3: Steve is a promoter as he is the party responsible for starting up the company.

Company Law for Business BLAW2006

Tutorial Questions – Topic 3
© Curtin Law School - Faculty of Business and Law 5/6
5/6
Steve has breached his duties as a promoter to the company as he has not made proper
disclosure in relation to his remuneration to an independent BoD or to the GM.  (Note that the
BoD is not independent as it consists of members of Steve’s family.)

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

Step 2: 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. 

131 (1) (2) (3)

Step 3: 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
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).

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

Step 4:

Company Law for Business BLAW2006

Tutorial Questions – Topic 3
© Curtin Law School - Faculty of Business and Law 6/6
6/6