Example Exam Q&A.LAW00004 Company Law s 2 2018S.docx

Example Exam Q&A.
LAW00004 Company Law s 2 2018
Slide
1 Sample Exam
© John ORR.
This material is subject to copyright. Not
to be reproduced without written
permission from the author.
Slide
2
- Topic 3 -
*****‘Takeaways’*****
(key points to be remembered)

• Promoters and their duties
• Pre-registration Contracts
• Internal Rules (Purpose/ Role; RR &or
Constitution/ statutory contract
• Altering the company’s constitution (statutory
& general law rules)
Slide
3
Question styles & Answer
Structures
• Problem Style Q: I: Issue
L: Law
A: Apply to law to the facts
C: Conclusion
• Essay Style Q: Introduction
Body
Conclusion

Sample Exam – Q2.
• Q2 is a problem style question and
ILAC/HIRAC is the structure to use.
Your approach could be as follows:
• What is specifically asked?
• What is the issue?
• What is the law?
• Apply the law to the facts
• Conclude on the likely outcome.
• Ensure your response answers the
question asked.
Slide
5 Sample Exam – Q2.
Samuel is a promoter of Edmanuals Pty and

executed a contract on behalf of Edmanuals Pty
before Edmanuals had been registered.
There are two issues for discussion.
1. the pre-registration contract and
2. the duties of a promoter.
Slide
Issue: Pre-registration contract
The Law:
• Note that the common law relating to pre-
registration contracts has been displaced by
Part 2B.3 Corporations Act; see s.133.
Slide
7
Part 2B.3
(Contracts before registration.)
• The basic structure is:

• 131(1) company becomes bound
• 131(2) person entering the contract is liable
• 131(3) & (4) powers of the court
• 132 person released from liability by 3P
• 133 covers the field.
• ** expand on the above.
Slide
Pre-registration contract: Application
• Under s.131(1) Edmauals may become liable for the
pre-registration contract if, within a reasonable time,
it ratifies the contract after registration.
• Where Edmanuals fails to ratify the contract Samuel
may be liable to pay damages to Samuel’s Cars Pty
Ltd, the other party to the pre-registration contract;
s.131(2)

Sample Exam – Q2.
Pre-registration contract: Application
• If Samuel’s Cars Pty Ltd brings proceedings to
recover damages against Edmanuals for failing to
ratify the pre-registration contract the court has
power to do anything it considers appropriate in the
circumstances.
• Here it is unlikely the court will order the Edmanuals
to pay damages or any amount to a party to the
contract.
Slide
Pre-registration contract
• A promoter (Samuel) may be liable for pre-registration
contracts. However s.132 provides that a party to the

contract (Samuel’s Cars Pty Ltd) may release the
person (Samuel) from liability; s.132(1). Given the
facts it is likely that Samuel’s Cars Pty will release
Samuel from liability. However the person (Samuel)
does not have a right of indemnity against the
company (Edmanuels Pty); s.132(2)
• Edmanuals should be advised not to ratify the pre-
registration contract.
Slide
Issue: Promoters duties
The Law:
• Start with a brief discussion on who are promoters.
• Promoters include persons involved in promoting a
company and inactive persons who leave the
promotion activities to others but who share in the
profits stemming from the company’s creation; Tracy v

Mandalay . The facts are clear that Samuel is involved
in the promotion activities and is a promoter.
Slide
Promoters duties
• Discuss the promoter’s duties owed to the company
• Promoters stand in a fiduciary relationship with the
company and must act in the company’s best
interests, act in good faith and the ‘utmost condour
and honesty’,
• Must not have a conflict of interest
• Must not profit at the expense of the proposed
company and must disclose all material facts
(including the nature and extent of any interest thy
may have in a transaction to an impartial board if
possible or to all the shareholders

Sample Exam – Q2.
Promoters duties
• Where the promoter makes an indirect unauthorised
(secret) profit by receiving a reward for arranging a
3rd party to contract with the company the promoter
is liable to account to the company for the profit;
• A contract by a promoter with the company will be
voidable at the company’s option in the absence of
sufficient disclosure; Gluckstein v Barnes
• In any event $10,000 per month for the hiring of a
car is excessive and the company can avoid the
contract due to the lack of disclosure regarding
Samuel’s nature and extent of his involvement in
Edmanuals Pty.
Slide

14 Sample Exam
Slide
15
- Topic 2 -
*****‘Takeaways’*****
• The relationship between s 51(xx) Australian
Constitution & Corporations Act 2001 (Cth)
• Role of ASIC
• The Separate Legal Entity Doctrine (&
Salomon’s Case
• Corporate Veil
Slide
• This is an essay style question and

ILAC/HIRAC is not the structure to use.
• What is specifically asked?
• Look at the statement and address the
required discussion.
Slide
The statement refers to the separate legal entity
doctrine.
You need to explain the doctrine and discuss the main
legal consequences of the doctrine under both:
• the common law; and
• the Corporations Act 2001 (Cth).
Slide
18 SLE under the Common Law
• Students are expected to discuss Salomon and the
development of the separate legal entities doctrine

through Lees Air Farming, and Macaura.
• The question invites a discussion on the development
of the ‘separate legal entities doctrine’, ‘limited liability’
and the ‘veil of incorporation’. You could give some
common law examples of lifting the veil.
Slide
19 SLE under the Corp Act
• Regarding the Corporations Act you should
discuss when a company comes into
existence; s.119 and the legal capacity and
powers of a company (esp. as an individual)
as expressed in s.124.
• You should develop your answer to include
areas such as perpetual succession and
management structure; s.198A (rr) and some
statutory examples of lifting the veil.

1
© John ORR.
TOPIC 8.1
*****‘TAKEAWAYS’*****
Insolvency (meaning of and significance)
Receivership & powers and duties of receivers
Role of and procedures within Voluntary Administration (VA)
and Deeds of Company Arrangements (DoCA)
Link between VA/DoCA and liquidation.
Definition of Insolvency
There are two approaches
Balance Sheet Test
Insolvency exists if value of total liabilities exceeds total assets

Cash Flow or Commercial Test
Insolvency exists if debtor is unable to pay debts as and when
they fall due.
CORPORATIONS ACT 2001 - SECT 95A
Solvency and insolvency
(1) A person is solvent if, and only if, the person is able to pay
all the person's
debts, as and when they become due and payable.
(2) A person who is not solvent is insolvent.
…..
Voluntary Administration
Part 5.3A
A process aimed at corporate rescue where an independent
person is appointed to
investigate the company for a short period and make a
recommendation to a meeting of
creditors as to whether the company should continue - usually
under some form of
arrangement (Deed of company Arrangement - DOCA) or if it
should be liquidated (wound

up)
…
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s7
61a.html#person
61a.html#person
61a.html#person
61a.html#person
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.
html#insolvent
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© John ORR.
What is the voluntary administration process?
………………..
Insolvency – the legal principles
The legal principles on insolvency are given more detail in Tru

Floor Service Pty Ltd v Jenkins (No 2)
[2006] FCA 632 where Sundberg J outlined as follows:
43 It is beyond doubt that s 95A mandates a "cash flow" rather
than "balance sheet" approach to
determining solvency. Therefore, an excess of current liabilities
over current assets is not conclusive of
a company’s insolvency and "cannot be more than a rule of
thumb" as to the same: Quick v Stoland Pty
Ltd (1998) 157 ALR 615 at 623 per Emmett J. Further, "[a]
temporary lack of liquidity must be
http://www.austlii.edu.au/au/cases/cth/federal_ct/2006/632.html
3
© John ORR.
distinguished from an endemic shortage of working capital
whereby liquidity can only be restored by a
successful outcome of business ventures in which the existing
working capital has been deployed"…
47 In Southern Cross Interiors Pty Ltd v Deputy Commissioner
of Taxation [2001] NSWSC 621;
(2001) 53 NSWLR 213, Palmer J reviewed at length the
authorities on determining solvency. His
distillation thereof (at [54]) bears repeating:

"[T]he following propositions may now be drawn from the
authorities:
(i) whether or not a company is insolvent for the purposes of the
Corporations Act (Cth), ss
95A, 459B, 588FC or 588G(1)(b), is a question of fact to be
ascertained from a consideration
of the company’s financial position taken as a whole ...;
(ii) in considering the company’s financial position as a whole,
the Court must have regard to
commercial realities. Commercial realities will be relevant in
considering what resources are
available to the company to meet its liabilities as they fall due,
whether resources other than
cash are realisable by sale or borrowing upon security, and
when such realisations are
achievable ...;
(iii) in assessing whether a company’s position as a whole
reveals surmountable temporary
illiquidity or insurmountable endemic illiquidity resulting in
insolvency, it is proper to have
regard to the commercial reality that, in normal circumstances,
creditors will not always
insist on payment strictly in accordance with their terms of

trade but that does not result in
the company thereby having a cash or credit resource which can
be taken into account in
determining solvency ...;
(iv) the commercial reality that creditors will normally allow
some latitude in time for
payment of their debts does not, in itself, warrant a conclusion
that the debts are not payable
at the times contractually stipulated and have become debts
payable only upon demand ...;
(v) in assessing solvency, the Court acts upon the basis that a
contract debt is payable at the
time stipulated for payment in the contract unless there is
evidence, proving to the Court’s
satisfaction, that:
• there has been an express or implied agreement between the
company and the creditor for
an extension of time stipulated for payment; or
• there is a course of conduct between the company and the
creditor sufficient to give rise to
an estoppel preventing the creditor from relying upon the
stipulated time for payment; or
• there has been a well established and recognised course of

conduct in the industry in which
the company operates, or as between the company and its
creditors as a body, whereby debts
are payable at a time other than that stipulated in the creditors’
terms of trade or are payable
only on demand ...; [and]
(vi) it is for the party asserting that a company’s contract debts
are not payable at the times
contractually stipulated to make good that assertion by
satisfactory evidence ...." (I have
omitted the numerous citations.)
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1
LAW00004
Company Law
SCHOOL OF LAW & JUSTICE
Session 2, 2018
TUTORIAL TOPIC 5.1
Directors’ duties
Activity 5.1.4
Activity 5.1.5
2
Activity 5.1.4
© John ORR.
2
© John ORR.
Activity 5.1.4
• The question raises the general issue of the
power of the board versus the power of the
general meeting.

• Does the general meeting have power to tell
the directors how to manage?
• The answer under replaceable rule 198A is
NO - the management power is vested in the
Board, not the General Meeting.
© John ORR.
Removal of a director.
• Only the company in general meeting (not the
directors) can remove a director from office under
section 203D and section 203E (Cash is a public
company)
• A director in Cash Ltd may be removed by resolution
section 203D(1) but notice must be given and director
must be informed and have opportunity to state their
case - see section 203D subsections (2) - (6)
• A director of a public company cannot simply be
removed by the other directors – section 203E
• Even if it had been done correctly under section 203D
this does not avoid any contractual or industrial
liabilities to the director
© John ORR.
3
Activity 5.1.4

• Despite the fact that normally the general meeting
does not have the power to direct the board, they
certainly do have the power to dismiss it under
section 203D risk faced by directors who ignore the
membership.
• The director cannot be dismissed by fellow directors
sections 203D, 203E thus dismissal is invalid.
• Actions such as defamation might be available.
© John ORR.
Activity 5.1.4
• In dismissing unlawfully are the directors following
their statutory obligations in section 181 or their
contractual obligation to follow the constitution
under section 140?
• Have they used their fiduciary powers unlawfully?
© John ORR.
Activity 5.1.4
• Section 232 cannot be used to override an article of
the company vesting power of management in the
directors without some evidence that the directors
have acted unfairly oppressively etc under s 232.
• For students wanting more - see the discussion on the
link between an earlier version of section 232 and the
directors broad power to manage in Wayde’s case.
© John ORR.

4
Activity 5.1.4
• Their unlawful dismissal of the director may be some
evidence but it is unlikely the courts will implement a
decision of the general meeting which breaches the
articles.
• The courts are likely to take the view that the remedy
of dismissal of the board lies in the general meeting.
© John ORR.
Activity 5.1.4
• There can be oppressive conduct of board
meetings, (such as decisions for the benefit of
related companies rather than shareholder in the
company)
• The issue of whether section 232 will apply to cases
where there has been an improper use of
management powers (as is the case) will focus on
the conduct of the directors
© John ORR.
Activity 5.1.4
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 [704]
(Young J)
relevant test : The inquiry as to whether it can be said,

after account has been taken of the nature of the
business carried on by the company and the nature of
the relations between its participants, that the impugned
conduct could be seen to be, objectively in the eyes of a
commercial bystander ... so unfair that reasonable
directors who consider the matter would not have
thought the decision fair.
In other words, a plaintiff has to prove conduct that,
considered in light of all of the relevant circumstances, is
inequitable or unjust; Wayde v NSW Rugby League Ltd
[1985] HCA 68; see also Mopeke Pty Ltd v Airport Fine
Foods Pty Ltd [2007] NSWSC 153 Brereton J
© John ORR.
5
Activity 5.1.4
Some examples of directors conduct found to
constitute oppression have included:
the repeated or persistent failure to hold meetings of
directors or members which are required to be held or
to allow proper discussion at meetings
Shum Yip Properties v Chatswood Investment [2002]
NSWSC 13 [205] (Austin J).
© John ORR.
Activity 5.1.5
Activity 5.1.5
There is a lot in this question!

• Failure to pay dividends
• Remuneration of directors
• Sale of hotels and change in company’s business
• Appears the two directors (Harrison and Whitelaw)
holding profits in company to build up value in
company, then to sell their shares.
• Might be seen as oppressive towards other members -
likely breach of section 232
• Have the directors breached their fiduciary duties to
the company in causing the sale of the shares?
• Were they acting in their own interests or in the best
interests of the company?
© John ORR.
6
Failure to pay dividends
• Oppression
• Resolution not to make a declaration of dividends
without anything further is a legitimate management
decision; Wayde v NSW Rugby League
• Quality of the management decision-making difficult
to defeat under oppression provisions; section 232
(but not impossible).
• Court generally reluctant to substitute its views for a
management decision

• Needs to be some form of evidence to get past the
management prerogative
16
Failure to pay dividends may constitute oppression or
unfairness when taking into account:
• history of the company,
• extent of its financial needs
• reasonable expectations of its members
Roberts v Walter Developments (1997) 15 ACLC 882
17
Remuneration of directors
Authorisation for directors’ remuneration:
• general meeting,
• Trans National’s CC
• statutory authority. Section 202A (RR) provides for
directors' remuneration by resolution of the company.
• Remuneration discovered by private inquiry. ?> no
informed consent by way of the general meeting.
• CC may allow for directors to determine their own
remuneration .
• If no authorising instrument can be found, then the
extra remuneration must be repaid to the company
• See also Ch 2E sections 208, 211, 228
18
7

Activity 5.1.5
Check and apply
General law directors’ duties
• care & diligence
• Esp fiduciary law (good faith & loyalty)
Statutory law directors’ duties
• Section 180 care & diligence
• Section 181 good faith & loyalty
• Section 182 good faith & loyalty – use of position
• Section 183 good faith & loyalty – use of
information
• Is there insider trading? (see Part 7.10 Div 3.)
© John ORR.
Overview of directors’ duties; Text p 239.
© Thomson Reuters
Directors’ Duties
Directors’ duties are divided into two broad groups
1. the duties of loyalty and good
faith; &
2. the duties of care and diligence.
Directors’ duties are governed by:
• the general law
• Corporations Act - esp sections180-184 & 588G
© John ORR.

8
1(a) Directors’ Duties of loyalty and good
faith; general law
Directors owe duties of good faith and loyalty
because they are in a “fiduciary relationship”
with their company.
A fiduciary relationship exists where:
• a person (eg, a director) is appointed to or
assumes to act;
• for the benefit of another person (eg,
company);
• in circumstances where the appointment
gives the appointed person powers which
could be exercised to the detriment of the
other person (eg, company).
© John ORR.
Directors are fiduciaries.
‘A fiduciary relationship is the relationship between a
person in a position of trust, (the fiduciary), and the
person for whose benefit the fiduciary acts (the
principal)’
Directors of a company are in a fiduciary relationship
with the company Mills v Mills (1938) 60 CLR 150, 185
(Dixon J)
© John ORR.
Classification of fiduciary duties
The general law impose duties – recognised under the

equitable principles as:
• a duty to act bona fide in the interests of the
company.
• a duty to exercise powers for their proper purposes.
• to retain discretionary powers
• a duty to avoid conflicts of interest.
© John ORR.
9
Fiduciary duties
No conflict
(a) the conflict of interest rule:
(b) the conflict of duties rule:
(c) the misappropriation rule:
No profit/gain
(d) the profit rule:
(e) the business opportunity rule:
The Bell Group v Westpac [No 9] [2008] WASC 239
[4496] (Owen J) citing Austin, Ford and Ramsay,
Company Directors, Principles of Law and Corporate
Governance (2005)
© John ORR.
Duty to act in good faith in the
interests of the company
• Duty requires directors to act ‘bona fide’ [in good

faith] and to act in the best interests of the
company.
• Directors also owe a duty to avoid actual or
potential conflicts of interest. The duty is a strict one.
• Director may breach the duty even though he or she
acts honestly and does not stand to make profit.
© John ORR.
Remedies for a breach of fiduciary
duty
• If director breaches a fiduciary duty and makes a
profit - director is accountable for that profit to the
company irrespective of whether the company
suffered any loss; see Regal (Hastings); Furs Ltd v
Tomkies.
• The company may also be able to seek imposition of
a constructive trust on a third party who assists the
fiduciary with knowledge of the breach
© John ORR.
10
1(b) Statutory Duties sections 181-184
Section 181 requires a director or other officer to act in
good faith in the best interests of the coy & for a proper
purpose in the exercise of their powers and the discharge

of their duties
The expression ‘improper purpose’ refers to an abuse of
power or the doing of an act which the person in
question has no authority to do
R v Byrnes (1995) 13 ACLC 1488
© John ORR.
Improper Use of Information & Position
• Sections 182 and 183 supplement the general law
fiduciary duty to avoid conflicts of interest
• Section 182 > director of a company must not make
improper use of their position to gain an advantage
for themself/someone else or to cause detriment to
the corporation
• Section 183 > director of a company must not make
improper use of information to gain an advantage
for themself/someone else or to cause detriment to
the corporation
• Sections 182 & 183 exhibits similar terminology by the
use of ‘improper use of’ information or position and
to ‘gain an advantage for themselves or to cause
detriment to the corporation’
© John ORR.
Civil and criminal provision
• Sections 180 -183 are civil penalty provisions
• Further, a criminal offence is committed re the duties

not to misuse information or position if the misuse is
dishonest or reckless section 184
• See ASIC v Adler (No3) (2002) 20 ACLC 576 - a case
on the effectiveness of civil penalties involving serious
breaches of directors’ duties
© John ORR.
11
2(a) Duties of Care & Diligence; general law
• Treat the requirements of ‘care’, ‘skill’ and ‘diligence’ as
overlapping requirements.
• Re City Equitable Life Insurance Co Ltd [1925] Ch 407 set
a standard of care to be expected of directors which
was not burdensome (see now Daniels v AWA)
© John ORR.
Summary of
duty of
care & Skill;
Text p 273
© Thomson Reuters
Reasonable Care
• Objective standard of care

• Standard of care expected - depends on
specific facts of case and varies depending
on the size and business of company and
knowledge, experience and skill of director
• See text p 321
© John ORR.
12
Skill set
• Director should have some basic
competency skills to undertake their duties
• For example, directors are expected to
understand the company’s affairs including
the financial statements and financial affairs
• See text p 324
© John ORR.
What is ‘diligence’?
Directors to monitor and guide the
management of the company Daniels v
Anderson (1995) 37 NSWLR 438, 501
Including:

• attendance at board meetings
• basic understanding of the business of the
company
• keeping informed about company’s financial
and general affairs
See text p 333
Duty of care
Elements of liability
• Care
• Skill
• Diligence
Re City Equitable Fire Insurance Co Ltd [1925] Ch 407
Section180(1) provides the statutory duty of care of a
director:
‘degree of care and diligence that a reasonable
person would exercise’
Section 180(1) = civil obligation only
Breach of other directors’ duties may cause criminal
liability; section 184
36
13
Activity 5.1.5
• Note sections 180-183 are civil penalty provisions
• Breach of civil penalty provisions > section1317E and

via ASIC seek pecuniary penalty order section 1317G
• disqualification order re H and W section 206C
• court may order compensation order section 1317H
• company may apply for compensation order where
director has contravened civil penalty provision
section 1317J(2)
© John ORR.
Activity 5.1.5
• General law –common law + equity section 185
• H and W owe fiduciary duties to the company
Percival v Wright [1902] 2 Ch 421.
• H and W (as fiduciaries) cannot retain a profit or
benefit that has been obtained following a conflict
of interest and/or a breach of fiduciary duty
Hospital Products
• Court could impose a constructive trust (Boardman
v Phipps) over the benefit/gain and remedy by
disgorging the benefit back to the company
• H and W may have to account of profit to the
company Cook v Deeks; Regal (Hastings) v Gulliver
© John ORR.
Activity 5.1.5
• The focus here is on directors' duties and members'
remedies. Foss v Harbottle please be aware that the
statutory derivative action provisions now override
the general law regarding derivative actions section

236(3)
• Foss v Harbottle as it relates to the proper plaintiff rule
and its exceptions has been abolished by section
236(3)
© John ORR.
14
Members’ Remedies
Corporations Act —
(Standing; Grounds, Orders)
Oppression sections 232-234
Statutory derivative action sections 236-242
Winding up section 461
Injunction section 1324
procedural irregularities section 1322
Activity 5.1.5
• Does the statutory injunction section 1324 apply?
• Section 1324 confers power on certain persons to
restrain conduct that is in contravention of the
Corporations Act by way of an injunction.
• Court also has power to award damages section
1324(10)
© John ORR.

Activity 5.1.5
• Could the company be wound up on the failure of
substratum ground? see Tivoli Freeholds and section
461(1)(k)
• Is this case where the court might allow a
representative action under sections 236/237?
© John ORR.
15
Activity 5.1.5
• Note also re evidence gathering
• Sam as a member may apply (in good faith and
for a proper purpose) to the court to make an
order authorising him to inspect the company’s
books under section 247A - note also section
247D (RR)
• Re general meeting re resolution not to make
declaration of dividends. Note company must
take minutes section 251A
• member (Sam) has access to minutes section
251B and can inspect and request copies
sections 251B(1) + (2)
© John ORR.

1
© John ORR
TOPIC 5.2
nsolvent trading & contravention
Ratification
Quarante Pty Ltd v The Owners Strata Plan No. 67212 [2008]
NSWCA 258 Sackville AJA
109 …doctrine of ratification , whereby:
“an act done, for another, by a person…acting for such other
person, without any
precedent authority, becomes the act of the principal if
subsequently [adopted] or ratified

by him.” (Emphasis in original.)
110 There are said to be three elements of ratification (GE Dal
Pont, Law of Agency (2nd ed
2008) par 5.7):
¦ the agent whose act is sought to be ratified must have
purported to act for the principal;
¦ at the time the agent acted, he or she must have had a
competent principal (that is, the
principal must have been in existence and capable of being
ascertained); and
¦ at the time of the ratification, the principal must be legally
capable of doing the act which
has been ratified.
............
Acting honestly
Australian Securities and Investments Commission v Macdonald
(No 12) [2009] NSWSC 714
Gzell J (James Hardie litigation)
17 …Palmer J in In Hall v Poolman [2007] NSWSC 1330
said..”acting honestly for the purposes of
Section 1317S(2) and Section 1318(1) is to be determined by

the ordinary meaning of the words,
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© John ORR
that is, whether the person has acted without deceit or conscious
impropriety, without intent to gain
improper benefit or advantage for himself, herself or for
another, and without carelessness or
imprudence to such a degree as to demonstrate that no genuine
attempt at all has been to carry out
the duties and obligations of his or her office imposed by the
CA or the general law. A failure to
consider the interests of the company as a whole, or more
particularly the interests of creditors, may
be of such a high degree as to demonstrate failure to act
honestly in this sense.]

...............
GO TO S 588G
Legal principles and 588G and reasonable grounds for
suspecting
ASIC v Plymin, Elliott & Harrison [2003] VSC 123
Mandie J
421. In James v Andrews [2001] NSWSC 1149; (2001) 166 FLR
11 a company registered and in
liquidation in New South Wales and its liquidator were seeking
compensation from a director of the
company in relation to failing to prevent the company from
incurring debts in New South Wales
while insolvent.
In the course of his judgment, Young CJ in Eq said at 13 - 15:
"The question that one must address when considering whether
there was a contravention of s
588G(2) is, assuming that the actions set out in the statement of
claim assert a failing to prevent a
company from incurring a debt, where did that failure take place
…before addressing that question

one must look to see what the words "failing to prevent"
comprehend. The word "failure" is a word
which can have various shades of meaning. …."volitional
delinquency”…Then one must look at the
word "prevent". ….the basic concept in the word is that
someone intervenes to control a state of
affairs, usually these days by stopping it. So the general flavour
of s 588G(2) is that someone has an
obligation to deal with the company's affairs in such a way to
stop it incurring a debt, and that that
person is guilty of volitional delinquency in and about that
obligation.
(a) The law
In order to satisfy the requirements of s.588G(1) it is necessary
for the plaintiff, …to prove that the
company was insolvent and at each time a debt was incurred
during the relevant period, there were
reasonable grounds for suspecting such insolvency.
…"Reasonable" in this context imports the
standard of reasonableness appropriate to a director of
reasonable competence and diligence,
seeking properly to perform his duties as imposed by law (when
viewed as a whole) and capable of
reaching a reasonably informed opinion as to a company's

financial capacity. In other words, facts
and matters must be shown to exist which would give grounds
for a director acting in accordance
with that standard to suspect insolvency
http://www.austlii.edu.au/au/cases/vic/VSC/2003/123.html
http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2001/1149.h
tml
88g.html
88g.html
88g.html
88g.html
3
© John ORR
427…As far as "grounds for suspecting" is concerned, I would
refer to and adopt what was said by
Kitto J in Queensland Bacon Pty Ltd v Rees [1966] HCA 21;
(1965) 115 CLR 266 at 303:
"A suspicion that something exists is more than a mere idle
wondering whether it exists or not; it is a
positive feeling of actual apprehension or mistrust, amounting

to "a slight opinion, but without
sufficient evidence", as Chambers's Dictionary expresses it.
Consequently, a reason to suspect that a
fact exists is more than a reason to consider or look into the
possibility of its existence. The notion
which "reason to suspect" expresses...is, I think, of something
which in all the circumstances would
create in the mind of a reasonable person...an actual
apprehension or fear... - a mistrust of the
payer's ability to pay his debts as they become due..." [72]
http://www.austlii.edu.au/au/cases/cth/HCA/1966/21.html
http://www.austlii.edu.au/cgi-
bin/sinodisp/au/cases/vic/VICSC/2003/123.html?stem=0&synon
yms=0&query=588E%20and%20Corporations%20Act%20and%2
0286(1).#fn71#fn71
1
LAW00004
Company Law
Session 2, 2018
TOPIC 4.2

Members’ rights & remedies
© John ORR.
This material is subject to copyright. Not to be reproduced
without written permission from the author
2
Topic 4 Members’ rights and remedies
AIM: At the end of this topic you
should be able to:
• Identify a member of a company
• Outline the procedural rules relating to membership
• Differentiate between personal and derivative rights
• Explain members’ rights arising under contract,
general law and statute and apply remedies
3
2
KEY POINTS
• General law — Fraud on the minority
• Corporations Act
(Standing, Grounds, Orders)
• Oppression; sections 232-234
• Statutory derivative action; sections

236-242
• Winding up; section 461
• Injunction; section 1324
• Procedural irregularities; section 1322
Member of a company
• ‘Member’ usually refers to a shareholder
• But, ‘member’ and ‘shareholder’ not synonymous
• Company limited by guarantee does not issue shares
but has members
• Company must have at least one member section
114
© John ORR
Member of a company
• Company has power to issue shares section 124
• ‘Shareholder’ means a member of the company
• Section 231 > ways in which person can become
member:
• A member on company’s registration;
• After registration –person agrees and name
entered on register of members
• Becomes a member under conversion provision
section167
‘person’ = natural and artificial

© John ORR
3
Company membership
• All companies must keep a ‘register of
members’ sections 168-169
• Register must be open for inspection (member
and non member) section 173
• Application to court to have register corrected
(company or ‘person aggrieved’ section 175
• Evidentiary value of registers to determine
member status section 176
© John ORR
Remedies available to members
© John ORR
Context of members’ remedies
• Important – lots of case law
• Tend to arise in concert with other aspects of
corporate administration eg directors’ duties and
powers
• Limitations

• Remedy for what purpose/to correct what harm?
9
4
Protections/remedies arising in …
Conflict of interests between:
members and directors directors exercising power in
ways that adversely affect members’ interests, eg
• directors disregarding members’ right to participate
in meetings
• dilution of voting power by issuing new voting shares
members themselves eg minority group disagree with
decision made at general meeting by majority vote
10
Members legal rights and remedies
Figure 14.1 , Textbook 10th ed p 426. .
Personal v derivative rights
• Rights held personally by member
eg right to vote, right to attend a members’
meeting
• Rights held by the company (derivative
rights)

12
5
Source of
remedies
Derivative
Statutory
derivative
action – Part
2F.1A
Personal
Contract General law Statutory
13
Source:
Figure 14.2
Text
10th ed p
461
.
Remedies available to members
© John ORR
General Law
Fraud on the minority

Contract
Corporations Act 2001 (Cth)
• Inspection of Books sections 247A-247D
• Class rights sections 246B-G
• Oppression sections 232-234
• Statutory derivative action sections 236-242
• Winding up section 461
• Injunction section 1324
6
General law: fraud on minority
• Section 1070A shares, and rights attached, are
personal property of member
• Majority vote > decision-making body
• Exercise power for proper purpose
Ngurli Ltd v McCann (1953) 90 CLR 425
Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656
Peters American Delicacy Company Ltd v Heath
(1939) 61 CLR 457
Gambotto v WCP Ltd (1995) 182 CLR 432
16
General law: fraud on minority
Examples of ‘fraud on minority’ include:
• Expropriation of company property Menier v
Hooper’s Telegraph Works (1874) 9 Ch App 350

• Improper ratification of directors’ breach of
duty Ngurli Ltd v McCann (1953) 90 CLR 425
• Expropriation of members’ property : Gambotto
v WCP Ltd (1995) 13 ACLC 342 (revise topic 3)
The test in Gambotto > expropriation of minority
shares – a valuable proprietary right – only
lawfully when it is:
(i) for a proper purpose and
(ii) fair in all the circumstances
© John ORR
Personal rights & remedies under contract law;
Upholding the constitution section 140
• Section 140 constitution = statutory contract
• Enforceable - by member in capacity of member
• Section 135(3) - breach does not constitute breach
of Act
• Remedy sought – court order forcing compliance
18
7
Personal rights & remedies under contract law
CORPORATE CONSTITUTION

1. Written document
2. Replaceable rules
3. Combination of 1 & 2
Section 136
Operates as a CONTRACT between:
• Company and member
• Company and director
• Company and company secretary
• Members amongst themselves
Section 140
Enforceable where breach affects:
• Member as member
• Director or company secretary (in that capacity)
Hickman v Kent or Romney Marsh Sheep Breeders’
Association [1915] 1 Ch 881
May be supplemented by:
• Shareholders’ agreement
• Supplementary ‘special’ contract
Members’ statutory rights & remedies
• Part 2F.3 sections 247A-247D Inspection of Books
• Part 2F.2 sections 246B-G Class rights
• Part 2F.1 sections 232-234 Oppression
• Section 461 Winding up
• Section 1324 Injunction
• Section 1322 Procedural irregularities

• Part 2F.1A sections 236-242 Statutory derivative
action
© John ORR
8
Part 2F.3 sections 247A-247D Inspection of Books
• A member can apply to the court for an order
authorising them to inspect the company books
under section 247A
• If section 247D (replaceable rule) applies, director (or
the general meeting through the passage of an
ordinary resolution) may authorise a member to
inspect the company’s books
© John ORR
Inspection of Books
Section 247A
• Applicant must be acting in ‘good faith’ and
the inspection must be for a ‘proper purpose’
• Does applicant have a bona fide interest in
accessing the documents?
• Inspection may be in connection with the
bringing of a derivative action under section

237 section 247A(5)(b)
© John ORR
Correction of the register and refusal to register
• A member has a right to have the register corrected;
section 175; and
• rights against the refusal to register a transfer of shares
without just cause; section 1071F
© John ORR
9
Part 2F.2 sections 246B-G Class rights
• The variation of shareholder rights found in sections
246B-246F seek to protect the special proprietary rights
attached to classes of shares from the unrestrained
voting power of the majority.
• A member has a right to challenge the variation of
shares section 246D
© John ORR
Variation of shareholder rights
• The removal of special rights given to classes of
shareholders is subject to a special meeting of the
class prior to any resolution at a GM.

• If there are constitutional provisions relating to the
variation of the class rights s.246B(1) must be
followed.
• If there is no constitutional provision for the variation
of the class rights s.246B(2) must be followed.
© John ORR
• STANDING – who?
• GROUNDS – why?
• ORDERS – what?
27
10
Statutory OPPRESSION REMEDY:
sections 232-234
STANDING
Section 234 Who can apply for order
GROUNDS
Section 232 Grounds for Court order
ORDERS
Section 233 Orders the Court can make
28
Statutory oppression remedy: sections
232-234

STANDING
Section 234 Who can apply for order
The definition of a member in section 231 is
important here although past members can apply
under limited circumstances and the ASIC has
some discretion.
© John ORR
Minority oppression sections 232-234
• A member or former member section 234 may apply for
remedy
under section 233
GROUNDS where the company has:
• acted in the ‘conduct of the company’s business’ section
232(a)
• through an act (actual or proposed) or omission section
232(b)
• passed/proposed a resolution, of members or a class of
members section 232(c)
that is:
• contrary to members’ interests as a whole section 232(d) or
• oppressive to/unfairly prejudicial to/unfairly discriminatory
against a member/s section 232(e)
30
11

GROUNDS
Section 232
Company’s conduct or an actual or proposed act or
omission or resolution is contrary to the interest of
members as a whole OR oppressive to, unfairly
prejudicial to or unfairly discriminatory against a
member OR members, whether in their capacity as
members or any other capacity a court may make an
order under section 233; see section 232
31
GROUNDS (Cont)
Originally - legislation referred only to “oppression” =
conduct which is ‘burdensome, harsh and wrongful’ Re
Bright Pine Mills Pty Ltd [1979] VR 1022 and Re Tivoli
Freeholds
[1972] VR 445
Section 232(e) Grounds now wider - encompass acts that
are
oppressive to,
unfairly prejudicial,
unfairly discriminatory, or contrary to
the interests of the members as a whole
all elements of same issue – commercial unfairness
© John ORR
ORDERS
Where breach of section 232 has been established,

court has the power to make range of under section
233 to remedy oppression or prejudice to members
Orders that may be made include:
• company be wound up - but note section 233(2)
• restrain/require specific acts
• constitution be amended - but note section 233(3)
• company to purchase member’s shares
• company partake in proceedings against another
party
• appointment of receiver
33
12
Conduct deemed to be oppressive under section 232
• Inaction
• Gains by controlling member or director
• Restricting members’ voting rights
• Dividends – failure to pay or review policy
• Uncommercial loans
• Exclusion from management
• Failure to provide information
• Abuse of process
TB 444-445
34
Further oppression cases

Vadori v AAV Plumbing (2010) 77 ACSR 616
Campbell v Backoffice Investments Pty Ltd [2009] HCA
25
© John ORR
Statutory WINDING UP: sections 461 &
462
STANDING
Section 462 Standing to apply for winding up
GROUNDS
Section 461 General grounds on which company may
be wound up by Court
ORDERS
Section 461 General grounds on which company may
be wound up by Court
36
13
STANDING
Section 462(2) provides for those who may
apply for the winding up of a company under
an order of the court:
a) The company
b) A creditor
c) A contributory
d) The liquidator

e) ASIC (pursuant to section 464)
f) ASIC (subsection 2A)
g) APRA
• See also section 462(5)
© John ORR
GROUNDS
Nine general grounds section 461(1)(a)-(k).
For example,
(e) directors have acted in their own interests rather
than in the interests of the members as a whole
(f) affairs of the company are being conducted in a
manner that is oppressive or unfairly prejudicial or
unfairly discriminatory, contrary to interests of members
as a whole
(g) act/omission/resolution (or proposed) that is (or
would be) oppressive or unfairly prejudicial or unfairly
discriminatory, contrary to interests of members as a
whole
© John ORR
GROUNDS section 461(1)(k) just & equitable
• Court can not make an order to wind up the
company on just and equitable grounds if some
other remedy is available section 467(4)
• Section 461(1)(k) imports a wide discretion on the
courts

© John ORR
14
Just and equitable winding-up order
section 461(1)(k)
• Justifiable lack of confidence in management of
company’s affairs
ASIC v AS Nominees Ltd (1995) 62 FCR 504
• Breach of equitable considerations
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360
• Fraudulent or oppressive conduct
• Company unable to make/implement decisions due
to deadlock in management
Re Yenidje Tobacco [1916] 2 Ch 426
• Failure of substratum (company’s purpose)
Re Tivoli Freeholds Ltd [1972] VR 445
40
ORDERS
Section 461
• ‘the court may order the winding up of a company’
• Doughty v Abboud [ 2010] NSWSC 721
© John ORR

INJUNCTIONS section 1324
STANDING
Section 1324 (1) & (2) On application
• of ASIC
• by a person whose interests have been,
are or would be affected by the conduct
© John ORR
15
GROUNDS Section 1324(1)
Conduct that constituted/constitutes/would constitute:
a) Contravention of CA
b) Attempt to contravene CA
c) Aiding, abetting, counselling, procuring
contravention of CA
d) Inducing/attempting to induce contravention of
CA
e) Directly/indirectly concerned with/party to
contravention of CA
f) Conspiring to contravene CA
43
ORDERS
Court may grant an injunction. Section1324 generally
provides for an injunction:

• restraining the contravention of the Act, or
• compelling compliance with the Act; section
1324(1)&(2)
Court has power to order a variety of remedies
including damages section 1324(10)
44
PROCEDURAL IRREGULARITIES
Section 1322 Court has power to declare
proceedings invalid if there has been or might be a
substantial injustice and that cannot be remedied by
any other orders
Liwszyc v Smolarek [2005] WASC 199 Per Hasluck J
54-56
Biodiesel Producers Limited (ACN 099 165 876
099 165 876 ) v Stewart [2007] FCA 722 at 353
45
16
Source of
remedies
Derivative
Statutory

derivative
action – Part
2F.1A
Personal
Contract General law Statutory
46
STATUTORY DERIVATIVE ACTION (SDA)
Before 2000, rule in Foss v Harbottle (1843) 67 ER 189
• Proper plaintiff rule
• Ratification of wrong by simple majority
Exemptions:
• Actions ultra vires
• Requirements of constitution not met
• Infringing personal rights of member
• Fraud on minority
• Interests of justice
Section 236(3) abolished this general law derivative action
47
SDA - sections 236-242
STANDING
Section 236
(1)standing
(2) proceedings brought in company’s name
Section 237

• Applying for and granting leave
48
17
Subject to section 237(3), a court MUST grant leave if it
is satisfied as to ALL the matters in section 237(2):
Requirements for leave:
(a) probable company will not itself bring proceedings
(b) applicant is acting in good faith
(c) in best interests of company that the applicant be
granted leave
(d) serious question to be tried
(e) notice is given unless waived by the court.
49
STATUTORY DERIVATIVE ACTION
Section 237(3) rebuttable presumption that
granting leave not in the best interests of the
company if:
a) Third party is involved,
b) the company does not to bring/defend
proceedings and
c) the decision of the directors conforms to the
business judgment rule section 180(2)
© John ORR

STATUTORY DERIVATIVE ACTION
ORDERS Court has wide powers under section 241
a) Interim orders
b) Conduct directions eg mediation
c) Order directing action
d) Appoint independent investigator
Note section 242 re orders as to costs.
Vadori v AAV Plumbing [2010] NSWSC 274 Ward J
Oates v Consolidated Capital Services Ltd
[2009] NSWCA 183 per Campbell JA
Power v Ekstein [2010] NSWSC 137 per Austin J at 95
and 105
© John ORR
18
STATUTORY REMEDIES (SUMMARY)
• Investigating company records and investigation
by ASIC;
• Variation of shareholder rights
• Correction of the register and refusal to register
• Oppression: sections 232-234
• Winding up by the court see section 461; note‘just
and equitable grounds; section 461(1)(k)
• Injunctions; see section 1324
• Statutory Derivative Action; sections 236-242
© John ORR

KEY POINTS
• General law — Fraud on the minority
• Corporations Act
(Standing, Grounds, Orders)
• Oppression; sections 232-234
• Statutory derivative action; sections
236-242
• Winding up; section 461
• Injunction; section 1324
Topic 4 Members’ rights and remedies
AIM: At the end of this topic you
should be able to:
• Identify a member of a company
• Outline the procedural rules relating to membership
• Differentiate between personal and derivative rights
• Explain members’ rights arising under contract,
general law and statute and apply remedies
54
19
Next Week
Lecture — Topic 5.1

• Directors’ duties
Tutorial/Collaborate
Attempt Activity 4.3.2
1
LAW00004
Company Law
Session 2, 2018
TUTORIAL TOPIC 1.2
Activities 1.2.4 & 1.2.6
2
Activity 1.2.4
2
Question styles & Answer Structures
! Problem Style: I: Issue
L/R: Law/Rule
A: Apply to law to the facts

C: Conclusion
! Essay Style: Introduction
Body
Conclusion
Is this a partnership?
• Stated in question ‘A, B and C are in a
partnership…..’
• Partnership status is given and there is no need to
apply the three essential elements.
Partnership Act - Section 24
• Is there an agreement?
• Will section 24 apply?
3
Comparative provisions
Partnership Act 1892 (NSW)- section 24
Rules as to the interests and duty of partners …subject to
special
agreement
(1) The interests of partners in the partnership property and
their
rights and duties in relation to the partnership shall be
determined, subject to any agreement expressed or implied
between the partners, by the following rules:

(1) All the partners are entitled to share equally in the capital
and
profits of the business, and must contribute equally towards the
losses whether of capital or otherwise sustained by the firm.
(2) The firm must indemnify every partner in respect of
payment
made and personal liabilities incurred by the partner.
(a) In the ordinary and proper conduct of the business of the
firm,
…
(3) A partner making, for the purpose of the partnership, any
actual payment… beyond the amount of capital which the
partner has agreed to subscribe is entitled to interest at the rate
of seven per centum per annum from the date of the
payment….
A’s position
• The opportunity to purchase the grain arises in the
course of her duties as a partner.
• 'A' purchased the grain using her personal account
not that of the partnership.
• Therefore 'A' would argue that purchase occurred in
the ‘course of her duties as partner’, accordingly
reimbursement should follow provided the conduct
was "ordinary and proper" under 24(1)(2).
4
Assessing A’s position
Questions:

• Did A follow normal procedures in buying the grain
as she did?
• Has the grain been used in the normal course of
business of the partnership?
• Why is there a requirement for two partner signatures
on a cheque drawn against the partnership bank?
'ordinary and proper'
• What is 'ordinary and proper' may be found by
examining past practices of purchasing grain.
• What are the past practices for the partnership?
Activity 1.2.6
5
Issue: Nature of business relationship
• What is the legal status of the relationship, if any,
between W, H & B?
• Is it a partnership?
Partnership
In determining whether or not a partnership
exists, the most important factors are
the intentions of the parties to carry on a business
in common as expressed by mutual rights and
obligations which is evident by looking at the

total facts.
6
Statutory definition of a “partnership”
Section (1)(1) of the Partnership Act 1892 (NSW)
‘Partnership is the relationship which exists between
persons carrying on a business in common with a view
of profit…’
Essential elements:
1. Carrying on a business
2. By persons in common
3. With a view of profit
16
Partnership - 3 essential elements
• Set out the legal principles of the three essential
elements (see Duke v Pilmer extract)
• Apply the three essential elements to the factual
scenario
1: Persons carrying on a business
• Refer to Study Guide & Partnership Act
• ‘Persons’ includes any legally recognised
person, including a company
• ‘Business’ defined section 1B(1) PA
• Must be the same business Checker Taxicab Ltd v Stone

[1930]
NZLR 169
• ‘Carrying on’ – no statutory definition
• Judicial guidance
= ‘activities were systematically organised and involved
continuous and continuing transactions’; Duke v Pilmer
[1999] SASC 97 para 973
18
7
Essential Element 2: In Common
• Not necessary for each partner to be actively
involved in the business
• The courts look for evidence that partners have "a
mutuality of rights and obligations between them"
and that they each act as agent for all the other
partners (mutual agency)
• see Duke v Pilmer [1999] SASC 97 para 952-954 & 962
• Fulfilled if agency relationship binds parties, where each
party carrying on business is acting on behalf of the others
• The intention of the parties is essential in determining the

scope of the agency relationship
• Judicial interpretation includes inactive capital
contributors (‘sleeping partners’) Duke Group Ltd v
Pilmer [1999] SASC 97
• More than agency – mutuality of rights and obligations
between the parties Smith v Anderson (1880) 15 ChD
247.
20
2: ‘in common’
3: ‘With a view to profit’
• Intention to make profit ‘at very heart’ of partnership
relationship Bova v Avati [2009] NSWSC 921
• Immaterial if venture successful or not and makes
losses
• ‘Profit’ not defined in Partnership Act
21
8
With a view of profit
• This distinguishes partnerships from social and
non-profit organisations.
• ‘…the effect of the authorities is that, however profit

may be identified or calculated, it connotes a direct
and definable pecuniary gain. It does not mean the
receipt of some other type of benefit or advantage,
even if some benefit ultimately leads to a pecuniary
gain’; Duke v Pilmer [1999] SASC 97 para 973
Partnership Act 1892 (NSW)
The courts have interpreted section 1
Partnership Act by applying the general law
partnership principles
Partnership Act also sets out rules (in section 2),
framed negatively, to which regard shall be
had:
• common ownership of property;
• sharing of gross returns;
• sharing of profits suggests partnership but is not
conclusive; s 2(1)(3)(b)
Take a look at s 2 Partnership Act.
Issue: Rights of Boating House Pty Ltd against
WB&H Company for $20K still owing.
If partnership - Partnership Act will apply.
• Refer to section 7 (is B specially authorised by the
other partners?) if no ….B breached the fiduciary
duty regarding good faith to firm. Look at sections 28
& 29.
• Disclosure; section 28
• Account for private benefit derived without the
consent of the other partners; section 29

9
Partners owe fiduciary obligations.
28 Duty of partners to render accounts
29 Accountability of partners for private profits
30 Duty of partner not to compete with firm
Fiduciary obligations under Partnership Act 1892
(NSW)
28 Duty of partners to render accounts
(1) Partners in a firm other than an
incorporated limited partnership are bound to
render true accounts and full information of all
things affecting the partnership to any partner
or the partner’s legal representatives.
10
29 Accountability of partners for private profits
(1) Every partner must account to the firm for any
benefit derived by the partner without the consent
of the other partners from any transaction
concerning the partnership, or for any use by the

partner of the partnership property, name, or
business connexion.
(2) This section applies also to transactions
undertaken after a partnership has been dissolved
by the death of a partner, and before the affairs
thereof have been completely wound up, either by
any surviving partner or by the representatives of the
deceased partner.
30 Duty of partner not to compete with firm
(1) If a partner, without the consent of the
other partners, carries on any business of the
same nature as and competing with that of
the firm, the partner must account for and
pay over to the firm all profits made by the
partner in that business.
Boat House v WHB
! Is the firm liable in agency; see section 5 PA
! Note the flow chart re tests in section 5 (see next
slide)
11
Agency and partnership.
• Section 5 ‘Every partner is an agent of the
firm and of the other partners for the purpose
of the business of the partnership…’ (see flow
chart p 21 Study Guide)

• Note that like agency law liability under the
PA may be found via estoppel/ partnership
by holding out; section 14
It is important to note that partnership law is
related to agency law and the general
principles of agency law should be reviewed.
Section 5 test : Agency; p 21 Study Guide
Application of facts to section 5 tests
! Transaction does not meet these tests so firm is not
liable.
! Obviously B will be personally liable to Boating House
Pty Ltd.
33
12
Partnership Act 1892 (NSW) section 7
7 Partner using credit of firm for private purposes
(1) Where one partner pledges the credit of a firm …
for a purpose apparently not connected with the
firm’s ordinary course of business, the firm is not

bound unless the partner is in fact specially
authorised by the other partners; but this section
does not affect any personal liability incurred by an
individual partner.
(2) …
Issue: Can business be dissolved?
• Dissolved by Court?
• See section 35(c)(d) and (f) -just and equitable
35 Dissolution by the Court
On application by a partner the Court may order a dissolution of
the partnership in any of the following cases: …
(c) When a partner, other than the partner suing, has been guilty
of such conduct as, in the opinion of the Court, regard being
had to the nature of the business, is calculated to prejudicially
affect the carrying on of the business.
(d) When a partner, other than the party suing, wilfully or
persistently commits a breach of the partnership agreement, or
otherwise conducts himself or herself in matters relating to the
partnership business so that it is not reasonably practicable for
the other partner or partners to carry on the business in
partnership with the partner.
(f) Whenever in any case circumstances have arisen, which, in
the opinion of the Court, render it just and equitable that the
partnership be dissolved.
13
Activity 1.2.6 (cont)
So,

• Partners have unlimited liability – section 9
• See section 35(e) Dissolution by the Court …
partnership can only be carried on at a loss.
Section 44: Rule for distribution of assets on
final settlement of accounts
In settling accounts between the partners after a
dissolution of partnership, the following rules shall,
subject to any agreement, be observed:
(a) Losses, including losses and deficiencies of capital,
shall be paid first out of profits, next out of capital, and
lastly, if necessary, by the partners individually in the
proportion in which they were entitled to share profits.
39
14
40
(b) The assets of the firm, including the sums, if any,
contributed by the partners to make up losses or
deficiencies of capital, shall be applied in the following
manner and order:
1 In paying the debts and liabilities of the firm to persons
who are not partners therein
2 In paying to each partner ratably what is due by the firm

to the partner for advances as distinguished from capital
3 In paying to each partner ratably what is due from the
firm to the partner in respect of capital
4 The ultimate residue, if any, shall be divided among the
partners in the proportion in which profits are divisible.
Applying principles to facts
• W, H and B (subject to agreement) will have to
contribute $100,000 each (the full amount of their
private assets)
1
© John ORR.
TOPIC 8.2
Insolvency (meaning of and significance)
Distinguish the types of liquidations (Voluntary v compulsory)
Winding up in insolvency (including statutory demand process)
Assets available and the role of the liquidator re voidable
transactions.

Types of liquidation:
Original Source: Fisher, Wiseman & Anderson 2001, p. 435
2
© John ORR.
…..
A transaction of the company may be voidable and could be
challenged by the
liquidator:
Voidable Transactions
where company being
wound up
s 588FE
insolvent transactions (s 588FC) 6 months* s 588FE(2)
uncommercial transactions (s 588FB), 2 years* s 588FE(3)
Related party transaction (s 588FC) 4 years* s 588FE(4)

Transaction with a designed to defeat
creditor
10 years* s 588FE(5)
unfair loans to a company (s 588FD) No limit s 588FE(6)
unreasonable director-related transactions
(s 588FDA).
4 years* s 588FE(6A)
Voidable transaction
when under VA or
DoCA before being
wound up.
-uncommercial transactions (s 588FB); or
-unfair preferences (s 588FA); or
-unfair loans to a company (s 588FD); or
-unreasonable director-related
transactions (s 588FDA).
s 588FE(2A)
s 588FE(2B)

*ending on relation-back day = day order for winding up is
made; s 9 or if VA
preceded the winding up the day the VA began; s 513C
Winding up in insolvency
88fe.html
88fc.html
88fe.html
88fb.html
88fe.html
88fc.html
88fe.html
88fe.html

88fd.html
88fe.html
88fda.html
88fe.html
88fb.html
88fa.html
88fd.html
88fda.html
88fe.html
88fe.html
3
© John ORR.
(Original Source: Fisher, Wiseman & Anderson, 2001, p. 439)
1

LAW00004
Company Law
Session 2, 2018
TOPIC 2 TUTORIAL
ACTIVITIES 2.1.5 & 2.2.1
Prescribed Texts
Thomson Reuters, Corporations Legislation 2018
2
Activity 2.1.5 Study Guide p 33
5. Using the Index to the Australian Corporations
Legislation, what are the statutory provisions in
relation to:
(a) the qualifications needed to be registered as an
auditor;
(b) the power of ASIC to examine records and books
of a
corporation;
(c) the definition of a small proprietary company?
What are the statutory provisions in relation to:
(a) the qualifications needed to be registered as an

auditor?
Distinguish between the requirements and
qualifications.
• > INDEX – ‘Auditor’[p 2720]/’registration of’ [p2721]
• Go to ss 1279, 1280* & 1280A, [p1505]
• Regs 9.2.01-9.2.03 [pp2191-2191]
• Note s.1280(2A) [p1492].
• Note ss.1280(3) -(4).
• Note also s.1281 - AG-deemed registered.
• *Note the Editor’s notes after the section. Cross-
references to Corporations Regulations. [p1506]
(b) the power of ASIC to examine records and
books of a corporation?
• INDEX –ASIC [p2718]
• See Australian Securities and Investment
Commission (p 2724)
• See Australian Securities and Investment
Commission /’information
gathering’/’Inspection of Books, [p2725] - see
‘Inspection of books’
• See ‘Inspection of books’ [p2767] / ‘ASIC,
by’…’powers, exercise of’ …ASIC Act s 28
• See ASIC Act s 28 and note s 29 [p 2479]
3
(c) the definition of a small proprietary company?

• INDEX - 'Proprietary Company' [p2791] – note you are
only directed to 'proprietary company' ss 9, 45A(1).
• GO TO s.9 "Small Proprietary Company" [p 118] and
note that it has the meaning given by subsection
45A(2).
• Alternatively GO TO s45A and see that 45A(2) [p 133]
refers to ‘small proprietary company.
• In passing note s 45B Small companies limited by
guarantee. (p 134).
Activity 2.2.1 Study Guide p 37
Case law
• In a common law system, creates binding legal rules
(Doctrine of precedent)
• May apply:
• in interpreting rules contained in the Corporations Act
• in imposing additional rules
• Consider - the significance of “the facts” of the case
to the facts of a given scenario.
4
Salomon’s Case
SALOMON v SALOMON (1897) HOUSE OF
LORDS

Issue: Could Salomon get priority for
(residual) £1,000 secured by his debentures?
© Thomson Legal & Regulatory Ltd.
© All Rights Reserved.
Facts: Salomon’s
shoe
business
Pty Ltd
sold
debentures
cash
Salomon
20,001 shares family 6 shares
(as Salomon’s
nominee)
Salomon’s case – facts (cont.)
• Downturn/strikes in boot industry
• Salomon & Co went into liquidation
• Company’s assets insufficient to pay both

• Debenture holder (secured creditor)
• Ordinary, unsecured creditors
• Liquidator, on behalf of unsecured creditors
• Objected to payment of secured debt
• Argued company acting as either agent (or trustee) for
Salomon
• Argued that Salomon should indemnify the company for its
debts
11
Salomon decisions
Trial: found for liquidator (acting for unsecured creditors)
• Company conducted business as agent for Salomon.
• Business = Salomon’s business (high degree of control)
• Salomon as Principle, to indemnify his Agent (Salomon &
Co Ltd) against business liabilities
Court of Appeal: found for liquidator
• Company = trustee, holding business on trust for Salomon
• Trustee entitled to indemnity from beneficiary for debts
incurred as trustee
• Salomon incurred liability to liquidator to pay trade
creditors
12
5

Salomon in the House of Lords
• Reversed earlier decisions
• Salomon & Co Ltd neither agent nor trustee
• Debenture was valid
• Salomon succeeded in claim against Salomon & Co
Ltd as secured creditor
• Structure of company compliant with Companies
Act 1862 (UK)
13
Prescribed Texts
Thomson Reuters, Corporations Legislation 2018
**Annotation: s 124 Corporations Act pp 185-187
Source: Thomson Reuters 2018, Corporations Legislation,
Includes annotations
pp 185-186
6

p 186
p 187.
Separate Legal Entity
The common law has developed a concept of
a company as a separate legal entity from:
• the person/s who created it
• the person/s who manage it: and/or
• the person/s who comprise it.
• The law recognises it as a distinct legal entity,
having a separate existence and a corporate
personality of its own.
• Company has capacity to contract, owns
property and has perpetual succession
(continued existence).
7
Distinction between private and
company assets
• Company may own assets in its own right, section 124
• Sole director and sole member companies
• Macaura v Northern Assurance Co Ltd [1925] AC 619
19

A company may contract with its
members
• Company may contract with its members
Lee v Lee’s Air Farming Ltd (1961) Ac 12 (Privy Council)
• Lee died in plane crash while “working for” Lee’s Air
Farming Ltd
• Insurance company argued that Mr Lee could not be
a worker and employer at the same time
• Privy Council held that Salomon allowed Mr Lee to act
in differing capacities as governing director,
shareholder and employee
20
Effect of registration
Registration section 117
separate legal entity sections 119 & 124
limited liability sections 516 & 517
Note also section 9 ‘limited company’
creates
facilitates
8

Activity 2.2.1 Was Salomon a Travesty?
• ‘ travesty’ = make ridiculous by grotesque/distorted
representation…
• No, the decision is not a travesty; if it had been
decided differently legislation would ultimately have
been needed to get this result.
• Separate entity and limited liability are critical to risk
taking and to a corporate capitalist economy.
Exceptions to SLE:
Lifting the Corporate Veil
You should also examine the common law and
statutory exceptions covered in the materials and the
text in areas other than holding/subsidiary company
relationships.
The corporate veil
• COMPANY
Separate legal
entity with own:
• Assets
• Liabilities
• Contracts
24
• INCORPORATORS
• DIRECTORS
• MEMBERS

• own shares but not a
proprietary interest in
the company’s assets
• may also be a
creditor, debtor or
director of the
company
V
E
I
L
9
Lifting the Veil
Existence of veil can be abused
consider the position of:
• unsecured creditors
• tort claimants
Because of abuses, the veil is sometimes
lifted to impose liability on:
• controllers
• directors (eg, Gilford Motors, Re Darby)
• holding/parent company (eg, s 588V)
Lifting the veil (cont)
Sometimes the lifting is to confer an advantage
(“reverse lifting”) eg, Smith Stone & Knight, Lee’s

Air Farming)
Two methods of lifting
(1) if statute has express provision
(2) under general law principles
Statutory grounds
Under Corporations Act 2001 (Cth)
• insolvent trading (ss 588G, 588V, 596AC)
• uncommercial transactions (ss 588FB-588FF)
• financial assistance (s 260D(2))
• Under other legislation (eg, taxation,
occupational health and safety,
environmental protection and various
regulatory regimes)
27
10
General Law Examples
• No relevant statutory provision, but,
for some overriding policy reason, a
court decides to lift the veil
• Australian courts have been more
reluctant to do this than the English
and American courts
General Law Examples

Difficult to reconcile cases but consider
general descriptive categories
• Fraud
• Company formed to evade an existing
obligation
• Company is agent of the controller
• Company knowingly participates in breach
of director’s fiduciary duties
• Part of a group of companies (but see s
588V)
• Possibly, tort claims
• Possibly, if interests of fairness and justice
require
Next Week’s Activities
© John ORR
TOPIC 6

• General Law (care, skill & diligence
• Corporations Act (s180)
Extended definition of director
The term 'director' is defined in s 9 and includes
(a) a person who is validly appointed to the position of a
director; and
(b) a person who is not validly appointed as a director if: (i)
they act in the position of
director (de facto director); or (ii) the directors of the company
are accustomed to act in
accordance with the person's instructions or wishes (shadow
director) .
Tests
Care; Text [11.320], 10th ed p 321
Skill; Text [11.340], 10th ed p 324

Diligence; Text [11.350], 10th ed p 333
The Business Judgment Rule; s 180(2)
See Text [11.490], 10th ed p 344.
Facts:
Regal see Text [13.53] 10th ed p 391
Facts: Cook v Deeks see Text [13.83], 10th ed p 392
The facts of Furs Ltd v Tomkies [1936] HCA 3 are set out in
Chameleon Mining NL v
Murchison Metals [2010] FCA 1129 [184 - 185] (Finn, Stone
and Perram JJ) (the Court) as
follows:
http://www.austlii.edu.au/au/legis/cth/consol_act/cl184/s9.html
http://www.austlii.edu.au/au/cases/cth/HCA/1936/3.html
http://www.austlii.edu.au/au/cases/cth/FCA/2010/1129.html
2
© John ORR.

Furs Ltd’s managing director, Tomkies , who was authorised to
negotiate the sale of a
part of a business, arranged for its sale to a company to be
formed. In the course of
negotiations he demanded to be paid £5,000 by the purchaser.
This was agreed to and was
to take the form of £4,000 in promissory notes and 1,000 in
shares. This payment was not
disclosed to Furs Ltd. Tomkies also arranged for his future
employment by the purchaser.
This was disclosed. Furs Ltd brought proceedings against
Tomkies seeking a declaration
that the shares belonged to it and an order that they be
transferred to it. It sought as well
an order that he pay to it all moneys received by him. The
progressive documentation of
the transactions betrayed considerable creativity in the view
taken of the nature of the
payment of £5,000. As was said in the joint judgment of Rich,
Dixon and Evatt JJ (at
597):

... [t]he documents represent it successively as a remuneration
for procuring
the sale [ie a procuration fee], as a lump sum consideration for
entering into
the service agreement, and as the price of the formulas and the
secret
processes.
[It was held that ]
[E]xcept under the authority of a provision in the articles of
association, no director
shall obtain for himself a profit by means of a transaction in
which he is concerned on
behalf of the company unless all the material facts are disclosed
to the shareholders and
by resolution a general meeting approves of his doing so, or all
the shareholders acquiesce.
An undisclosed profit which a director so derives from the
execution of his fiduciary duties
belongs in equity to the company. It is no answer to the
application of the rule that the
profit is of a kind which the company could not itself have
obtained, or that no loss is

caused to the company by the gain of the director. It is a
principle resting upon the
impossibility of allowing the conflict of duty and interest which
is involved in the pursuit of
private advantage in the course of dealing in a fiduciary
capacity with the affairs of the
company.
(Emphasis added.)
ASIC v Adler,
See Text [11.215], 10th ed p 310.
AWA Ltd v Daniels
see Text [11.312], 10th ed p 316
1
LAW00004
Company Law

Session 2, 2018
TOPIC 6.1
Corporate fundraising
2
Activity 6.1.3
X, Y and Z were the sole directors of Austral Ltd, a public
company. A and B were
each registered holders of a large part of the company’s
shareholding. Over a
period of about five years, A and B had continually brought
frivolous and
vexatious lawsuits against the company, against the directors,
and against each
other. The company, as a result, was hindered in its everyday
management, and
the price of its shares was declining.
Article 50 of the constitution of the company stipulated:
‘whensoever a shareholder shall be desirous of selling his
shares or any part
thereof, he shall first offer the same to the directors for the time
being at the
company, who may take the shares at a fair price’.
A and B contracted to sell some of their shares to outsiders,
retaining others. They

also advertised their intention to sell all of their shares as soon
as possible.
The constitution was altered, largely at the instigation of X, Y
and Z, to give power
to the directors for the time being of the company to
compulsorily acquire the
shares of any member at a fair price.
3
2
Discuss, citing authority where appropriate, whether
(a) X, Y & Z may, after the Articles were altered,
compulsorily acquire any of the shares of A and B;
4
Alteration of CC
• s 135(2) RR can be displaced/modified by the
adoption of a constitution
• s 136(2) company has power to alter its constitution
by a special resolution of its members
reading the sections together, conclude that replaceable
rules can also be displaced or modified by a special
resolution

Limitations
• Statutory: see ss 140(2), 136(3)-136(4), Part 2F.2
(special rights) and Part 2F.1 (oppression)
• General law: eg additional tests of fairness
Gambotto’s Case
• Was the alteration to the CC for a proper purpose?
• Was the alteration to acquire the shares of existing
shareholders “necessary to protect or promote the
interests of the company” (per McHugh J at 453) in
circumstances that is not oppressive to existing
shareholders?
6
3
• Alteration was directed at A & B,
• Too broad? Could be used against any shareholder?
• If alteration had been directed against them
specifically - A & B may have better chance of
success.
• Could A & B bring an action under section 232?
7

• A member or former member s 234 may apply for remedy
under s 233
where the company has:
• acted in the ‘conduct of the company’s business’ s 232(a)
• through an act (actual or proposed) or omission s 232(b)
members
that is:
• contrary to members’ interests as a whole s 232(d) or
• oppressive to/unfailry prejudicial to/unfairly discriminatory
against a member/s s 232(e)
8
Key terms in section 232(e)
oppressive
unfairly prejudicial
unfairly discriminatory
Wayde v New South Wales Rugby League Ltd (1985)
180 CLR 459
9
4

Where breach of s 232 has been established, court
has the power to make range of under s 233 to
remedy oppression or prejudice to members
• company be wound up
• constitution be amended
party
10
Activity 6.1.3
Under Part 6A.2 (section 664A) a 90% holder of
shares in the class to be acquired can
compulsorily acquire any other shares in that class
Notwithstanding this, if the change to the
constitution is valid, A and B may apply to the
Court to have the acquisition (or the resolution)
overturned as oppressive conduct; ss.232-234.
However due to the frivolous and vexatious
lawsuits brought it appears they have no grounds
to argue that there is a detriment to the company
as a whole - in fact quite the reverse.
© John ORR
Activity 6.1.3
If the alteration had been directed against them

specifically it may have had a better chance of
success given their past behaviour;
Note specifically the Gambotto test (proper
purpose & fair in all the circumstances) and the
exceptions as to when a compulsory acquisition
may be allowed.
Note also the possible use of section 232 on these
facts though A & B may have difficulty establishing
oppression given their behaviour.
© John ORR
5
Note
• Many of the questions involving oppressive
behaviour of majorities have much in common with
each other.
• You could use this question as a part model for
answering such questions, (Topic 6 has some
additional remedies for minorities not relevant on
these facts).
(b) X, Y & Z have any rights against A & B concerning
the shares which they contracted to sell.
Article 50:
Whensoever a shareholder shall be desirous of selling
his shares or any part thereof, he shall first offer the
same to the directors for the time being at the

company, who may take the shares at a fair price.
14
Activity 6.1.3
Under section 1070A(1)(a) a share is ‘personal
property
Section 1070A(1)(b) ‘transferable or transmissible as
provided by a company's constitution’
So X,Y and Z have rights to A's and B's contracted
shares
© John ORR
6
A company can enforce its memorandum and
articles against a recalcitrant shareholder; rule in
Eley v Positive Government Security Life Assurance Co
Ltd (1876) 1 Ex D 88
Now enshrined in statute law
Section 140(1) - goes further than the case law
Provides that the CC is a contract between:

(a) the company and each member,
(b) the company and each eligible officer,
and
(c) a member and each other member.
X, Y & Z are directors ….
So can direct the company to sue A & B
for their breach of the constitution.
18
7
Are X, Y & Z also shareholders in
Austral Ltd?
• If they are members X, Y & Z could sue as such to
enforce the provisions of the CC regarding the
shares which A and B contracted to sell
• They could as members also direct the company to
sue A & B for their breach of the constitution.
19
Remedies?

• Contract law: declaration or injunction
• Section 1324 injunction - available for a breach of
the statutory contract?
• Section 1324 injunction available for a
contravention (or threatened contravention) of
the Act
Activity 6.2.3
Is the area of law relating to security interests
satisfactory and clear?
Identify any difficulties in the provisions relating to
registration of security interests.
© John ORR
8
Personal Property Securities Act 2009 (Cth)
• A great deal has been written on the PPSA
• The objective was the rationalisation of more than 70
separate Acts which regulated personal property
securities in Australia.
• By providing (more or less) a common set of rules for all
secured transactions and a single register.
• Source: Davies --- "Personal Properties Securities Act 2009
(Cth): objectives and emerging issues" (FCA) [2014]

Federal Judicial Scholarship 7
© John ORR
Personal Property Securities Register
• The PPSR operates as a noticeboard of
security interests in personal property
• As at 31 December 2013, there were over 7.7
million registrations on the Personal Property Securities
Register (PPSR). The register is suffering from overload
Source: Leigh Adams Lawyers, Top tips to overcome
the practical problems with the PPSR, May 22, 2014
© John ORR
PPSA
• A person who holds a ‘security interest’ in
‘personal property’ may ‘perfect’ the security to
preserve a position of priority should a dispute
between competing security interests arise.
• A security interest is ‘perfected" if it has ‘attached’
to ‘collateral’, it is enforceable against third parties
and it has been registered or the secured party
has control or possession of the collateral.
Source: Davies, noted above.
© John ORR
9

5 ways - perfecting a security interest
1. transitional security interest (pre 30/1/12) were
protected under transitional provisions as a transitional
security interest; s 322A PPSA (no longer applies - period
ended 30/1/2014.
2. perfection by registration,
3. perfection by possession;
4. perfection by control (of controllable property); s 27
PPSA; and
5. temporary perfection; s 39(3)(b)) PPSA.
Source: Leigh Adams Lawyers, noted above.
© John ORR
PPSA – Priority
• priority between perfected interests is determined by
order of registration; or
• time of first perfection by control or possession;
• priority between unperfected interests is determined
on a first-in -time basis
Source: Davies, noted above
© John ORR
‘PPSA is not easy to read’
• The PPSA is a major reform and a significant piece of
legislation.
• Whilst the PPSA is a well-structured Act… the PPSA
cannot be picked up and read or understood easily

© John ORR
10
‘not old wine in a new bottle’*
Not easy to read or understood – why?
1. An entirely new regime governing personal property
securities
2. PPSA has its own statutory language
3.Complex rules and technicalities.
4. Perennial problem of statutory interpretation.
example: security interest:
- An interest in personal property
- -provided for by a transaction
- Transaction secures payment or performance obligation.
• Source: Davies, noted above
© John ORR
PPSR - registration
• Problem of non-registration
• ‘Millions of dollars have already been lost by
businesses that paid for an asset but had not
registered that asset on the PPSR. Whilst it’s voluntary
to register, businesses need to be alert to the
requirement that, if they are going to register, they
have to do so within a very tight registration time
period.’
Source: Craig Waldon PPSA/PPSR – Auditors and Accountants

Beware!,
meth.od.ol.o.gy, November 17th, 2014, citing Peter Towers
© John ORR
PPSR - registration
• Completing the financing statement
• generally the online financing statement is
completed and the applicable fee is paid.
• The purported secured party (grantee) needs to
have a security interest at that time or a belief on
reasonable grounds that the secured party is or will
become a secured party in relation to the identified
collateral: section 151.
Source: Leigh Adams Lawyers, noted above
© John ORR
11
PPSR - registration
The Registrar is bound to accept the application
unless it is frivolous, vexatious or offensive, or contrary
to the public interest; PPSA section 150
Source: Leigh Adams Lawyers, noted above
© John ORR

PPSR – registration
• ‘Initial registration of a financing statement on the PPSR
is very easy. You simply go to the Personal Property
Securities Register (PPSR) website and follow the links,
enter the prescribed data, pay a small fee and hit a
button or two.
• The ease of registration, compared to a paper based
registry such as land titles or the former company
charges register, makes the PPSR more open to abuse.’
Source: Markmckillopbarrister,
Court Injuncts Sham PSR Registrations
© John ORR
Sandhurst v Coppersmith
Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd
[2014] VSC 217
Robson J accepted (at paragraphs 108 to 118) that
the court has jurisdiction to grant an injunction
restraining a person from seeking to register further
financing statements
Source: MinterEllison, noted above
© John ORR
12
Sham Registration
• Registration of sham* (bogus or false but presented as

true) financing statements on an electronic register has
been a persistent problem in other jurisdictions with a
PPSR equivalent. They have frequently been used as a
retaliatory measure by political activists, prison inmates,
the disgruntled and others looking to harass or intimidate
public officials, corporations, banks, among others
Source: MinterEllison Lawyers, ‘Sham financing statements
on the PPSR: problems caused and their resolution’, 22
May 2014
© John ORR
PPSR – registration
• Although administrative and judicial processes exist
under the PPSA to remove a sham financing
statement, in practice, a contested process can be
time consuming and costly.
• Whether the existing provisions are adequate for the
purpose is a real issue.
Source: MinterEllison Lawyers, ‘Sham financing statements on
the
PPSR: problems caused and their resolution’, 22 May 2014
© John ORR

1
LAW00004
Company Law
Session 2, 2018
TOPIC 6.1
Corporate fundraising
2
Activity 6.1.3
X, Y and Z were the sole directors of Austral Ltd, a public
company. A and B were
each registered holders of a large part of the company’s
shareholding. Over a
period of about five years, A and B had continually brought
frivolous and
vexatious lawsuits against the company, against the directors,
and against each
other. The company, as a result, was hindered in its everyday
management, and
the price of its shares was declining.
Article 50 of the constitution of the company stipulated:
‘whensoever a shareholder shall be desirous of selling his
shares or any part

thereof, he shall first offer the same to the directors for the time
being at the
company, who may take the shares at a fair price’.
A and B contracted to sell some of their shares to outsiders,
retaining others. They
also advertised their intention to sell all of their shares as soon
as possible.
The constitution was altered, largely at the instigation of X, Y
and Z, to give power
to the directors for the time being of the company to
compulsorily acquire the
shares of any member at a fair price.
3
(a) X, Y & Z may, after the Articles were altered,
compulsorily acquire any of the shares of A and B;
4
Alteration of CC
• s 135(2) RR can be displaced/modified by the
adoption of a constitution
• s 136(2) company has power to alter its constitution
by a special resolution of its members
reading the sections together, conclude that replaceable
rules can also be displaced or modified by a special

resolution
Limitations
• Statutory: see ss 140(2), 136(3)-136(4), Part 2F.2
(special rights) and Part 2F.1 (oppression)
• General law: eg additional tests of fairness
Gambotto’s Case
• Was the alteration to the CC for a proper purpose?
• Was the alteration to acquire the shares of existing
shareholders “necessary to protect or promote the
interests of the company” (per McHugh J at 453) in
circumstances that is not oppressive to existing
shareholders?
6
• Alteration was directed at A & B,
• Too broad? Could be used against any shareholder?
• If alteration had been directed against them
specifically - A & B may have better chance of
success.
• Could A & B bring an action under section 232?
7
• A member or former member s 234 may apply for remedy

under s 233
where the company has:
• acted in the ‘conduct of the company’s business’ s 232(a)
• through an act (actual or proposed) or omission s 232(b)
members
that is:
• contrary to members’ interests as a whole s 232(d) or
• oppressive to/unfailry prejudicial to/unfairly discriminatory
against a member/s s 232(e)
8
Key terms in section 232(e)
oppressive
unfairly prejudicial
unfairly discriminatory
Wayde v New South Wales Rugby League Ltd (1985)
180 CLR 459
9
2

Where breach of s 232 has been established, court
has the power to make range of under s 233 to
remedy oppression or prejudice to members
• company be wound up
• constitution be amended
party
10
Activity 6.1.3
Under Part 6A.2 (section 664A) a 90% holder of
shares in the class to be acquired can
compulsorily acquire any other shares in that class
Notwithstanding this, if the change to the
constitution is valid, A and B may apply to the
Court to have the acquisition (or the resolution)
overturned as oppressive conduct; ss.232-234.
However due to the frivolous and vexatious
lawsuits brought it appears they have no grounds
to argue that there is a detriment to the company
as a whole - in fact quite the reverse.
© John ORR
Activity 6.1.3
If the alteration had been directed against them
specifically it may have had a better chance of
success given their past behaviour;

Note specifically the Gambotto test (proper
purpose & fair in all the circumstances) and the
exceptions as to when a compulsory acquisition
may be allowed.
Note also the possible use of section 232 on these
facts though A & B may have difficulty establishing
oppression given their behaviour.
© John ORR
Note
• Many of the questions involving oppressive
behaviour of majorities have much in common with
each other.
• You could use this question as a part model for
answering such questions, (Topic 6 has some
additional remedies for minorities not relevant on
these facts).
(b) X, Y & Z have any rights against A & B concerning
the shares which they contracted to sell.
Article 50:
Whensoever a shareholder shall be desirous of selling
his shares or any part thereof, he shall first offer the
same to the directors for the time being at the
company, who may take the shares at a fair price.
14
Activity 6.1.3

Under section 1070A(1)(a) a share is ‘personal
property
Section 1070A(1)(b) ‘transferable or transmissible as
provided by a company's constitution’
So X,Y and Z have rights to A's and B's contracted
shares
© John ORR
A company can enforce its memorandum and
articles against a recalcitrant shareholder; rule in
Eley v Positive Government Security Life Assurance Co
Ltd (1876) 1 Ex D 88
Now enshrined in statute law
Section 140(1) - goes further than the case law
Provides that the CC is a contract between:
(a) the company and each member,
(b) the company and each eligible officer,
and
(c) a member and each other member.
X, Y & Z are directors ….

So can direct the company to sue A & B
for their breach of the constitution.
18
3
Are X, Y & Z also shareholders in
Austral Ltd?
• If they are members X, Y & Z could sue as such to
enforce the provisions of the CC regarding the
shares which A and B contracted to sell
• They could as members also direct the company to
sue A & B for their breach of the constitution.
19
Remedies?
• Contract law: declaration or injunction
• Section 1324 injunction - available for a breach of
the statutory contract?
• Section 1324 injunction available for a
contravention (or threatened contravention) of
the Act
Activity 6.2.3

Is the area of law relating to security interests
satisfactory and clear?
Identify any difficulties in the provisions relating to
registration of security interests.
© John ORR
Personal Property Securities Act 2009 (Cth)
• A great deal has been written on the PPSA
• The objective was the rationalisation of more than 70
separate Acts which regulated personal property
securities in Australia.
• By providing (more or less) a common set of rules for all
secured transactions and a single register.
• Source: Davies --- "Personal Properties Securities Act 2009
(Cth): objectives and emerging issues" (FCA) [2014]
Federal Judicial Scholarship 7
© John ORR
Personal Property Securities Register
• The PPSR operates as a noticeboard of
security interests in personal property
• As at 31 December 2013, there were over 7.7
million registrations on the Personal Property Securities
Register (PPSR). The register is suffering from overload
Source: Leigh Adams Lawyers, Top tips to overcome
the practical problems with the PPSR, May 22, 2014

© John ORR
PPSA
• A person who holds a ‘security interest’ in
‘personal property’ may ‘perfect’ the security to
preserve a position of priority should a dispute
between competing security interests arise.
• A security interest is ‘perfected" if it has ‘attached’
to ‘collateral’, it is enforceable against third parties
and it has been registered or the secured party
has control or possession of the collateral.
Source: Davies, noted above.
© John ORR
5 ways - perfecting a security interest
1. transitional security interest (pre 30/1/12) were
protected under transitional provisions as a transitional
security interest; s 322A PPSA (no longer applies - period
ended 30/1/2014.
2. perfection by registration,
3. perfection by possession;
4. perfection by control (of controllable property); s 27
PPSA; and
5. temporary perfection; s 39(3)(b)) PPSA.
Source: Leigh Adams Lawyers, noted above.
© John ORR
PPSA – Priority
• priority between perfected interests is determined by

order of registration; or
• time of first perfection by control or possession;
• priority between unperfected interests is determined
on a first-in -time basis
© John ORR
‘PPSA is not easy to read’
• The PPSA is a major reform and a significant piece of
legislation.
• Whilst the PPSA is a well-structured Act… the PPSA
cannot be picked up and read or understood easily
© John ORR
4
‘not old wine in a new bottle’*
Not easy to read or understood – why?
1. An entirely new regime governing personal property
securities
2. PPSA has its own statutory language
3.Complex rules and technicalities.
4. Perennial problem of statutory interpretation.
example: security interest:
- An interest in personal property

- -provided for by a transaction
- Transaction secures payment or performance obligation.
• Source: Davies, noted above
© John ORR
PPSR - registration
• Problem of non-registration
• ‘Millions of dollars have already been lost by
businesses that paid for an asset but had not
registered that asset on the PPSR. Whilst it’s voluntary
to register, businesses need to be alert to the
requirement that, if they are going to register, they
have to do so within a very tight registration time
period.’
Source: Craig Waldon PPSA/PPSR – Auditors and Accountants
Beware!,
meth.od.ol.o.gy, November 17th, 2014, citing Peter Towers
© John ORR
PPSR - registration
• Completing the financing statement
• generally the online financing statement is
completed and the applicable fee is paid.
• The purported secured party (grantee) needs to
have a security interest at that time or a belief on
reasonable grounds that the secured party is or will
become a secured party in relation to the identified
collateral: section 151.

Example Exam Q&A.LAW00004 Company Law s 2 2018S.docx

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