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Corporations Law 730 - 456

Tutorial VIII
Monday 25 May 2009

DISCLAIMER:
These tutorials and the notes are designed to assist students in their learning.
The tutorials and the notes are not a substitute for the course material, nor
should they be relied upon as representative of the subject matter of the
course. Neither the Melbourne University Law Students’ Society nor the
student tutor of these tutorials will take responsibility for any consequences
flowing from the use of the material provided in the tutorials or in the notes.

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Sample Examination Answer: 2008 semester 2
Question Three: part (a)

Abby, Bruno and Carly have become good friends while studying at the
University of Melbourne Law School. Like a number of other students, they
are having a hard time making ends meet and are looking for a way to make
a little money, while at the same time keeping up with their studies. Abby,
the entrepreneurial one, suggests they get together and create a
“notetaking” service for other students who have a hard time making it to
class. Each of them would choose a course, attend all the classes and
prepare notes based on the lectures and materials, integrating all other
pertinent, useful information. They would use a broadcast email to advertise
the availability of the notes and sell them for $500 a set.

Would you give Abby, Bruno and Carly any advice at this point on their
business?

A, B and C are “carrying on business in common with view to profit”:

Partnership Act (Vic), s 5(1). Therefore, they are likely to be
deemed a partnership regardless of whether or not this was their
intention: Canny Gabriel Advertising v Volume Sale. Trading as a
partnership has important implications from a tax and liability
perspective. Each of the partners will be jointly liable for the actions
of the others Partnership Act (Vic), s 16. Should A, B and C wish to
separate liability, they might consider incorporating: Solomon’s
Case. If the decide to incorporate the business their continued
employment with and management will not affect their business’
separate legal entity status: Lee’s Air farming. A small proprietary
company appears to suit their business needs because of the
reduced financial reporting requirements and auditing standards:
Corporations Act (Cth), ss 292-4, 296. Incorporation may be done
under s 117 of the Corporations Act (Cth). There is a fee of
approximately $800 involved. Alternatively, A, B and C may apply
under section 54 of the Partnership Act (Vic) of for registration as a
limited partnership. An incorporated limited partnership also has
the advantage of separating A,B and C’s liability from that of the
partnership: Partnership Act (Vic), s 84. I recommend A, C and D
seek tax advice before they begin generating income from the
business. I also recommend taking out liability insurance if they do
not decide to incorporate.

Question Three: part (b)

Abby, Bruno and Carly decide they need a catchy logo to attract some
business, so they decide to call themselves “Notes4U”. Abby decides to go a
little further and advertises an introductory session on how to use the notes;
she orders in $500 worth of pizza for the session from her cousin, Dexter, at

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Dominico’s Pizzeria, promising to pay him with the proceeds from the sale of
notes at the introductory session (it’s a slam dunk , she says). At the session
Abby also guarantees that anyone purchasing the notes will receive at least a
75% in the Corporations exam, provided they use the notes. The introductory
session fizzles. A few weeks go by. Abby doesn’t pay Dominico’s Pizzeria and
a disgruntled student, Emily, who has just used the notes receives a 74%.
She complains to Bruno. Dominico’s Pizzeria sends a letter to Abby
demanding payment.

Advise Abby, Bruno and Carly on potential consequences.

A, B and C have two potential claims against them, namely

enforcement of A’s promise to:
(a)pay $500 to D; and
(b)ensure E will receive 75% in her exam.

Critical to both claims is whether or not A had sufficient authority to

contract on behalf of “Notes4U”. Under s 9 of the Partnership Act
(Vic), A’s actions will bind “Notes4U” unless:
(a)A has no authority to act in the circumstance; and
(b)E and D either knew she had no authority or believed A was
partner of Notes4U.

There is insufficient evidence sustain realistic comment on point (b).

As an aside, I note that if A has represented to E or D that she is
“partner” then Notes4U’s liability is established without
investigation into whether or not A had requisite authority in the
circumstances: Partnership Act (Vic), s 18. We do not have any
evidence that such a representation has been made.

In relation to the important question of whether A had the requisite

authority to bind the partnership in ( see: point (a)), regard will be
had to common law principles. In my view A had “apparent
authority” to bind the partnership in the circumstances. For this to
be made out, E and D will need to prove that:
(a) A was held out by the partnership as having the
requisite authority to make promises on behalf of the
partnership ; and
(b) E and D relied on these representations when
entering into the contact: See, eg, Crabtree-Vickers Pty Ltd,
Pacific Carriers Ltd; Freeman v Lockyer

Note4U’s Representations
The facts show that B and C allowed A to conduct the introductory
session complete with pizza and guarantees as to the
trustworthiness of the notes. The introductory session was
advertised under the “Notes4U” name and was sanction by the
partners. Considered globally “Notes4U” held A out as having the
requisite level of authority to enter into the two contracts. A
different conclusion might have been reached if the pizzas had been

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delivered to A’s personal residence or if A had been alone in
delivering the introductory course or had been delivering the course
in her personal capacity.

E and D’s Reliance

Clearly D has relied on the fact that Notes4U was conducting the
introductory session, that the session will be “a slam dunk” and that
Notes4U will be able repay out of the proceeds of introductory
session.

Less clear is whether E has relied on Notes4U’s apparent sanction of

the “75% guarantee”. E says this is why she purchased the notes.
More likely, she made her purchase knowing a degree of
independent thought was required make good on Notes4U’s
guarantee.

Moreover, quite aside from whether A’s representations were

capable of binding the partnership, there is a live issue whether A’s
representations to E were contractual promises or “mere puff”. The
latter seems probable. It is also unclear how the court will quantify
E’s loss: how does a 1% grade loss sound in damages? My advice to
A, B and C would be that E’s claim is, all things considered, spurious.

Conclusion
Notes4U will need to pay D $500 but will not need to pay E as it is
unlikely that Notes4U’s guarantee is enforceable. The $500 debt will
need to be paid by the Notes4U: Partnership Act (Vic), s 14. If the
debt cannot be paid by the partnership it will need to be paid by the
partners personally: Partnership Act (Vic), s 13

Question Three: part (c)

Things get sorted out and the business continues on. After a year or so, there
is an increased demand for notes in a broad range of courses. Abby, Bruno
and Carly can’t keep up. Again, Abby takes the initiative and invites her
cousin Dexter to pitch in and take on a course or two (he’s grown tired of the
pizza business), promising him an equal share in the profits. Dexter is pretty
hardnosed and also demands an up front payment of $1000, which Abby
agrees to. Bruno and Carly are very annoyed with Abby for not consulting
them and don’t think much of Dexter. Bruno and Carly refuse to share any
profits with Dexter.

Advise Dexter.

D has a potential claim against Notes4U to enforce the invitation to

share in Notes4U’s profits.

I reiterate comments above in relation to section 9 and 18 of the

Partnership Act

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In the absence of any evidence as to D’s knowledge of A’s authority
or D’s belief that A was partner of Notes4U, D’s claim will stand or
fall on whether A had the requisite level of authority in the
circumstances. This is a question of fact and may be argued either
way. In my view, on the balance of probabilities, she did have the
requisite authority in the circumstances.

A is a founding member. It was her idea to order the pizzas. It was

her idea to hold the introductory session. It was her idea to set up
the “notes” business in the first place. It appears that B and C are
used to acquiescing with decisions made by A on behalf of the
partnership. It is also clear that B and C through silence have
equipped A with a certain status within the partnership and have not
established proper safeguards to protect Notes4U (and outsiders
such as D and E whom Notes4U deals with) from unauthorized
conduct made on behalf of the company: Pacific Carrier Ltd v BNP
Paribas. In the circumstances, it is likely that A had either implied
actual authority or ostensible authority to bind the partnership and
D will accordingly be entitled to enforce the contract to become a
member.

An alternate view of the facts would be that admitting a partner is a

burdensome and important decision which ordinarily requires the
consent of a majority of the partners. This view would focus on B
and C’s dissent and suggest that albeit B and C are used to
acquiescing in decisions made by A, their acquiescence did not
extent to granting A a unilateral power to admit a new partner
without first obtaining B and C’s consent.

D should be advised he has an arguable case but that ultimately the

success of his claim will stand or fall on the factual analysis adopted
by the court.

Question Three: part (d)

Emily is still arguing with Abby about her mark, and decides as a matter of
principle, to take legal action. She wants to sue Abby but wonders about
Bruno, Carly and Dexter. Advise Emily.

As Notes4U is not incorporated, the partners will be jointly and

severally liable for any claims made against the partnership:
Partnership Act (Vic), s 13

E may be very angry at A but she has no claim against A personally,

other in her joint capacity as a partner of Notes4U. This is because
E’s claim arises out of her purchasing notes from “Notes4U”
pursuant to representations made by A on behalf of Note4U. I
would advise E that any claim she brings is likely to be enforceable
against B, C and D also.

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Question Three: part (e)

Carly has had enough. She tells Abby, Bruno and Dexter that she doesn’t
want anything else to do with them or the business. What may be the legal
consequences of Carly’s decision?

C can voluntarily resign from the partnership by giving notice:

Partnership Act (Vic), s 30. From the date of resignation, C will not
liable for the acts and omissions of her fellow partners: She will
however still however be liable for any debts and liabilities
sustained while she was a partner of Notes4U: Partnership Act (Vic),
s 13.

Question Three: part (f)

Things get sorted out again and Abby, Bruno and Dexter carry on the
business by themselves. Frank, an RHD student, has been watching the
business take off and is interested in getting in on it, but without actually
doing any of the work. He has just inherited $100,000 and writes a cheque to
“Notes4U Pty Ltd” for that amount. Frank also insists on being able to
participate in all decisions being made. Abby, Bruno and Dexter ask your
advice about how to cash the cheque and what to do about Frank.

To cash the cheque, A, B and D will need to dissolve the partnership

under s 38 of the Partnership Act (Vic) and incorporate Notes4U as a
proprietary company under s 117 of the Corporations Act (Cth).
Amongst other things A, B and D will need to create a company
constitution and organize the company’s share structure and
directorships: Corporations Act (Cth), s 112.

For F to be participate in decision making of the company he will

need to be a director: Corporations Act (Cth), s 198A. F can become
a director so long as he gives singed consent, is over 18 years of
age, as not previously been disqualified from being a director and
ordinarily resides in Australia: Corporations Act (Cth), ss 201B, 201A,
201D. It will also be necessary for Notes4U Pty Ltd’s shareholders to
either appoint F by ordinary resolution or to ratify A and B’s decision
to appoint him at an ordinary meeting: Corporations Act (Cth), ss
201H, 201G.

Question Three: part (g)

Abby, Bruno and Dexter take your advice. The business is doing
phenomenally well by now, and the notes are being bought by students all
over Australia. Remarkably, by the end of the financial year (30 June 2008),
the business has had revenues in excess of $15 million. What are the legal
consequences of this happy turn of events?

Notes4U Pty Ltd will be deemed a large proprietary company:

Corporations Act (Cth), s 45A. Notes4U Pty Ltd will consequently be

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subject to higher financial reporting requirements and auditing
standards: Corporations Act (Cth), ss 292-6

Question Three: part (h)

Abby and Frank have become pretty cosy with each other. Abby has been
approached by a large publishing house interested in putting together exam
review materials for the courses for which the business prepares notes. Abby
tells Frank, but not Bruno and Dexter, about the publisher’s proposal and
they decide to go it alone on the review materials proposition. Bruno hears
about this accidentally and is outraged. He asks your advice.

As directors A and F are obliged to put the interest of the company

first and cannot appropriate for their personal benefit business
opportunities which properly belong to Notes4U Pty Ltd: Cooks v
Deeks; Regal (Hastings). Moreover, A and F cannot improperly use
their position within Notes4U Pty Ltd to gain a personal advantage
or improperly use information obtained because of their position in
Notes4U Pty Ltd to gain a personal advantage: Corporations Act
(Cth), ss 182, 183. These duties apply regardless of whether or not
Notes4U Pty Ltd was able to exploit the opportunity presented by
the large publishing house: Regal (Hastings), Industrial
Development v Cooley. On the facts, it appears plain that A and F
have breached these general law and statutory duties. Should the
publisher’s proposal bear fruit, they will be obliged to account for
profits if any claim is brought against them.

Given A and F constitute 50% of the board (and presumably also 50%
of Notes4U Pty Ltd’s membership) it appears unlikely that Notes4U
Pty Ltd will bring proceedings. In the circumstances, B will need to
either:
(a) apply under s 237(2) of the Corporations Act (Cth) for leave
to bring a derivative action on the company’s behalf; or
(b)convince ASIC to prosecute.

Leave is likely to be granted as Notes4U Pty Ltd is unlikely bring

proceedings, the application has been brought in good faith,
prosecution of A and F is the best interest of Notes4U Pty Ltd as it is
likely to result in increase profits for the members and for the
reasons explained above there is a serious question to be tried:
Corporations Act (Cth), s 237(2) B will need to issue Notes4U Pty
Ltd with notice of his intention to bring the application 14 days
before applying for leave: Corporations Act (Cth), s 237(2)(e).

Question Three: part (i)

Unfortunately, Abby and Frank have become a little too cosy with some other
disreputable characters in Bangkok while on vacation together. The scandal
hits the papers in Melbourne. Both Abby and Frank have been convicted of

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drug trafficking in Thailand and sentenced to 5 years in prison. What may be
the consequences for the Notes4U business?

A director is automatically disqualified if convicted of a criminal

offence: Corporations Act (Cth), s 206B. Disqualification under s
206B includes “offences against the laws of a foreign country”:
Corporations Act (Cth), s 206B(1).
A and B will accordingly be disqualified from being directors of
Notes4U Pty Ltd for up to 5 years: Corporations Act (Cth), s 206F

Question Three: part (j)

Bruno and Dexter aren’t sure what to do at this point. They don’t think they
can carry on without Abby’s initiative and hard work, although they could
happily do without Frank. What would you advise them?

B and D may apply for relief from disqualification under ss 206F(5)

and 206G(1) of the Corporations Act (Cth). They will bear the onus
of showing that the prohibition should not apply for A: Re Magna
Alloys. In deciding, whether the relief should be given the court will
consider the nature of A’s drug trafficking offence (which may or
may not have implications as to her ability to honestly fulfill her
duties as a director), A’s general character, the structure of Notes4U
Pty and the influence exerted by A over B and D: Re Magna Alloys,
Re Hamilton-Irvine. Importantly, a finding that the Notes4U Pty Ltd
cannot continue carrying on business without A’s initiative, skill and
hard work is an important consideration and was a decisive factor in
the court granting relief in Re Hamilton-Irvine.

Should the court allow A resume her duties, then the court is likely
to impose conditions on her taking up her directorship such as a
requirement that her conduct be independently audited every 6
months: Re Hamilton-Irvine

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Sample Examination Answer: 2008 semester 2
Question One

“[C]harity may be good for business” (“leader of the Swarm”: the

Economist”)

Introduction
- The current regulatory framework of corporate law doesn’t allow
other interests to be taken into consideration except in very
limited circs
- Many contend that would need to change the entire framework to
have CSR incorporated.
- Set out the context in which increased discussion regarding CSR
and company charity is occurring:
 Role of Globalization - expanded role of multinationals across borders
 Increased role of environment and impact of CSR on demand or consumer choice
 Scandals at Enron, World Com and elsewhere undermined trust in big business
- Note also that there competing notions of what is meant by
company “charity” and CSR. Here is some commentators have
said…
 The term CSR does not have a precise or fixed meaning. Some descriptions focus
on corporate compliance with the spirit as well as the letter of the law. Other
definitions refer to a business approach by which a corp takes into account the
impacts of its activities on interest groups including, but extending beyond SH, and
that balances longer-term societal impacts against shorter term financial gains.
 Zerk: CSR is about companies acting ethically and doing good beyond minimal
legal requirements
 Part of the problem with CSR is that it is such a subjective notion – hard to actually
define.
- THEN, outline the issues canvassed in your response:
1. Theoretical underpinnings of
company law

2. Does the Corporations Act (Cth)

embrace charitable works and purposes? is the Act
consistent with CSR?

3. Should the Corporations Act (Cth)

go further and mandate CSR?

(1 ) Theoretical underpinnings of company law and the place of

charity
- What is the company? Is it just the sum of its shareholders or are
companies public entities which fulfill state-sanctioned
objectives?
- What is it is the primary purpose? Do we just see companies as
economic self-referential beings or do we admit a broader
purpose?

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- Differing perspectives on the purposes and constitution of a
company results in different views on the role of charitable works
and the obligation of companies to do public good.
- Concession Theory:
 This theory regards the corp as an artificial entity created by the state. The
separate legal status of the company is treated as a concession or privilege
granted by the state.
 The existence of corporations as legal entities is dependent on law, as is the extent
to which corps can enjoy that existence.
 Salomon v Salomon Lord Halsbury stressed the company was an artificial creation
of the legislature, but once the company was properly incorporated it had a real
existence.
 Has the capacity to emphasis the interest of the public over the private interest of
individuals and so potentially allows for mandating CSR
 This theory still continues to influence attitudes in Aus today: Brennan J stated in
the HC that a co’s existence, capacities and activities are only such as the law
attributes to it.

- Aggregate / Economic / Contractual theories:

 This theory sees each corporation as an exercise of an individuals right of
association rather than an act of the state.
 asserts the primary status of the individual and the private status of the
corporation.
 This theory would not allow for mandating CSR and would preference freedom of
those involved in the compay to determine co profits
 the law should be limited to facilitating the formation of these contractual
relationships
 Easterbrook and Fischel: The personhood of a corporation is a matter of
convenience rather than reality. This perspective insists that the only relevant
function of a co is to maximise the returns to individual investors.
 In summary, this contractual analysis treats the corporation as nothing more than
a shorthand expression of multiplicity of private, consensual, contract-based
relations between economic actors, each seeking to maximise his or her own
benefits.
 The corporation is not regarded as a creation of the state, but of private initiative
and enterprise.

- Communitarian Theory:
 Communitarians regard corps as being comprised of other important
constituencies in addition to SH’s.
 These include: employees, secured and unsecured creditors, customers and clients
as well as the local communities in which they operate.
 According to communitarian theory, non-SH constituents are unlikely to be able to
protect their interests adequately by resort to private contracts with each
corporation.
 Therefore, one of the claims of communitarian theory is that in addition to contract
law, a system of public corporate regulation is required because corporations are
institutions whose conduct can have substantial public implications.
- Ultimately issue comes down to whether you see company as an
entity sanctioned by the state (and therefore subject to its rules)
or as the private expression of self-interested individuals.
- Adequacy of the shareholder primacy purpose?
 Short term SH vs long term SH – which are more important? Are they
incompatible?

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  Much of the debate has centered on the interaction of the shareholder primacy
approach to corporate decision making and the social and environmental impact of
corporate conduct.
- Note also the interaction between SH primacy and CSR
 Potentially no conflict
 Public good in S-H primacy b/c potentially allows for more capital for Co to
undertake charitable works in the future.
 Note also derivate benefits to company (and the shareholders) in undertaking
charitable works
 Cite ASX Corp Governance Principles, principle 10: “companies can create value
by better managing their environmental, human and social imprint”

(2) Does the CA embrace Charity? Is it consistent with it?

Yes it does embrace it
- S 181(1)(a) does to an extent
- Creditor protection 588 W and Y
- Walker v Winborne: prior to this case creditors rights
unprotected. In this case where co is insolvent or close to
insolvent the duty of good faith embraces the interest of
creditors as well. Discuss also Sycotex
- S 1324 - right to injunctive relief: “any class of person whose
interest have been or are or would be affected by certain
conduct, which contravenes the CA, may bring action for an
injunction to stop the contravening conduct.
No it is inconsistent with CSR
- Discussion of Park v Daily News
- s 260A, even if a decision is made in GF can still be oppressive
Wade v NSW Rugby
- Financial assistance can be provided to buy shares in that co
where it doesn’t materially prejudice the co interest, SH or ability
to pay creditors.
- Note the material prejudice to any other class of persons, such
as, employees, is not taken into account.
- Liability of directors to the members. CA does not facilitate the
appt of D’s to the board who represent interests other than those
of the SH.
- Conclude that ultimately Corporations Act adopts a maximization
of profits approach only embraces CSR to the extent that it is
consistent with shareholder profits

(3) Should the legislation go further?

Arguments in favor:
- E Merrick Dodd: argued that because corporations are natural
entities, they have social responsibilities in addition to their
profit making functions. The duty of seeing that this social
function is carried out falls upon the corporations directors, who
act on behalf of the corporate entity.
- This means that directors are justified in making decisions which
favour interests other than SH, such as employees, consumers,
local communities, environment, As long as these decisions can

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 be justified in terms of the corps obligations as a good citizen
then SH objections can be overridden.
- Corps could be a major source of change– co should be meeting
societies expectations not just SH.
- CSR under the current model is just another marketing tool for
Corps. – need binding legislative provisions.
- Reality of global world today corps have major impact.
- UK Companies Act 2006 imposes reporting requirements on corps
to report on their impact on social and environment
- Corp law as stands equates the corporation to a natural person,
therefore, the corporation should also be bound by moral
obligations as well.
- James Hardie:
 The social responsibilities of corporations arise in the public discussion of James
Hardie Industries Ltd.
 The Jackson report concerned the handling by the parent co of the asbestos
liabilities of some of its subsidiaries. One aspect of that report, concerning ‘long-
tail liabilities’ (liabilities which may arise many years after the events or
transactions give rise to them), is under separate CAMAC review.

Arguments in against
- Commentators how have said the Corps Act should not embrace
include Firdeman and Milton who argue that because of
subjective nature of CSR it can be argued that the legislation
going further would impose vague and broad requirements on D’s
- practical problems in implementation CSR standards
- more efficient to have voluntary codes of conduct to determine
such issues
- May amounts to usurpation of the role of the government – the
considerations that CSR would impose are the realm of the public
sphere for elected officials to make decisions.
- Furthermore, the imposition of stricter legislation in relation to
CSR could be said to detract from investment choice of SH. More
beneficial to leave the personal responsibility of investor choice
in tact.
- arguable whether D’s have the qualifications and expertise to
make decisions on these issues.
- Professor Friedman and Professor Lumsden preferred strict
approach that only responsibility of a company was to maximise
shareholder returns
- Impact of the Business Judgment rule
 The BJR protects managers against those that argue they have breached their duty
to act with appropriate care and diligence. Generally mangers are entitled to a
presumption that they exercised proper business judgment if they can
demonstrate:
 The decision was made in good faith and for a proper purpose
 That they had no material personal interest in the matter
 They informed themselves of available material
 And they rationally believed that the decision was in the best interests of the
corporation.
 Could an obligation to consider wider social issues result in judges replacing
business judgment of directors with their own judgment?

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  This is seen as a reason for not moving too far from the wealth maximization norm.
In most cases the BJR will preserve manager’s decisions for judicial review
provided they can establish the above criteria.

- There is also the point concerning the impact of including any DD

with reference to the interests of non-SH. Presumably to have
any impact, such an obligation needs to be enforced. Who is best
suited to enforce an obligation to the act in the interests of the
community at large?
- L and F argue that CSR need not be enforceable. They suggest
that a self-regulatory model would encourage better performance
as if the model is successful, the market will reward those that
participate and may offer string incentive such as, positive
impact if good will, to other corporations to comply. This is only
possible if there is a genuine demand for this approach by
investors

Conclusion

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