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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.




                                                          Edward Thompson
                                             e.thompson@pgrad.unimelb.edu.au
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 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.


                                                                        Edward Thompson
                                                           e.thompson@pgrad.unimelb.edu.au
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 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.



                                                                       Edward Thompson
                                                          e.thompson@pgrad.unimelb.edu.au
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

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

                                                                        Edward Thompson
                                                           e.thompson@pgrad.unimelb.edu.au
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.

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,


                                                                       Edward Thompson
                                                          e.thompson@pgrad.unimelb.edu.au
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 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).


                                                                       Edward Thompson
                                                          e.thompson@pgrad.unimelb.edu.au
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 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




                                                                      Edward Thompson
                                                         e.thompson@pgrad.unimelb.edu.au
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?
- 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.

                                                                                 Edward Thompson
                                                                    e.thompson@pgrad.unimelb.edu.au
-   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?
          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


                                                                                 Edward Thompson
                                                                    e.thompson@pgrad.unimelb.edu.au
-   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 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.


                                                                                Edward Thompson
                                                                   e.thompson@pgrad.unimelb.edu.au
-   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?
          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




                                                                               Edward Thompson
                                                                  e.thompson@pgrad.unimelb.edu.au

								
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