Short answer questions
Sample Questions
a)
In the current public liability insurance debate there have been
suggestions that the law on joint and several liability be altered.
This will impact on the law of partnership. What is the nature of
liability that applies to partners in a partnership for contractual and
tortious liability?
b)
Promoters sometimes make contracts prior to the formation of a
company. Explain the nature of a promoter’s liability under section
131 of the Corporations Act.
c)
Hickman v Kent or Romney Marsh Sheep-Breeders Assoc (1915) 1
Ch 881 laid down a number of principles about statutory contract
that can still be seen in section 140(1) of the Corporations Act.
Explain the application of Section 140(1) of the Corporations Act.
d)
Explain when and how companies are required to appoint a
company secretary. Also explain the role of the company secretary.
5 x 4 marks = 20 marks
Answer to Part (a)
You need to discuss how liability arises as a result of the agency relationship
between partners (s9 Partnership Act 1958).
Also, you need to discuss sections 13,14 and 16 of the Partnership Act 1958.
On the liability issue for partners, you will find little difference between
contract and tort under s9 and s14.
Sample Answer to Part (b)
Section 131 of the Corporations Act deals with contracts before registration. In
common law the person entering into a pre-registration contract is not legally
bound by that contract because the company does not exist, therefore there is
no legal entity.
The case of Black V Smallgood is a good example of that. The court held that
a person who made a contract for a company prior to its registration could be
personally bound only if that person intended to be contracted as the
principle.
Section 131 now refutes that argument by applying the following laws.
S131 (1) refers to the company being bound by the pre-registration contract
after incorporation if it ratifies the contract within a reasonable time or agreed
time.
S131 (2) states that if the company does not ratify the contract or the
company does not register the promoter is liable to pay damages to the other
party. The amount the promoter is able to pay is the same as the company
would have been liable to pay.
S131 (3) applies to the courts powers to make the company pay damages
even though it did not ratify the contract. The court would do this if the
promoter was acting as an authorised agent of the company S126 (1).
The promoter may also be released from liability if the parties to the preregistration contract sign a release (S132 (1)).
Sample Answer to Part (c)
In Hickman v Kent or Romney Marsh Sheep-Breeders Association, Hickman
had a grievance with the Association and went to court regarding the
grievance. However the Articles of Association stated that all grievances must
go to arbitration. Therefore, by going to court, Hickman was breaching the
conditions set out in the Articles of Association.
S140 (1) is the section in the Corporations Act that relates to this case. It
states that the company’s constitution or replaceable rules which apply to the
company have the effect of being a contract
(a) between the company and each member;
(b) between the company and each director and the company secretary;
and
(c) between a member and each other member, under which each person
agrees to observe and perform the constitution and rules so far as they
apply to that person.
The case of Eley v Positive Security Life Insurance is a good example of the
application of s140(1). In this instance, the court held that the constitution
conferred no rights on a member where the member seeks to enforce a right
in a capacity other than as a member. Eley was seeking to assert a right in his
capacity as a solicitor of the company. In order to do so, he should have
entered into a separate contract independent of the constitution.
In the Rayfield v Hands case, both parties were directors and members of a
particular company. The Articles provide that when a shareholder wants to
sell shares they have to advise the directors. The directors would then buy
them and pay a fair value. The Articles in this case affected the directors’
capacities as members. Rayfield was therefore able to enforce that contract.
Answer to Part (d)
In this answer, there should be a discussion of s204 and s188 of the
Corporations Act.
Further Sample Questions
a) What is the nature of liability that applies to partners in a partnership for
contractual and tortious liability? Does the Partnership Act indicate any
substantive difference?
b) Paul has been wrongfully dismissed by his employer B & J Parts Pty
Ltd. Paul intends to sue the company. Brad and Janet the directors of
B & J Parts want to know whether they can avoid liability by simply
changing the name of the company? Alternatively can they dissolve B
& J Parts and start up a new company?
Advise Brad and Janet.
c) Metal Products Ltd makes all types of metal food packaging containers.
Of recent times metal containers have become too expensive and the
company has moved almost exclusively to making plastic coated
cardboard containers. As a result, Metal Products sells its metal
canning machinery and has capital in excess of its needs,
The company seeks your advice as to how it can return this excess
capital to shareholders under the Corporations Act 2001.
d) Upon what grounds can the ASIC apply to the Courts to have a person
banned from being a director and from managing a company? In
answering this question students may refer to recent cases of banning
orders against certain prominent individuals.
e) Analyse and explain the difference between a mortgage debenture and
an ordinary debenture under the Corporations Act 2001
(5 x 4 marks = 20 marks)
a) Explain the distinction between a joint venture and a partnership. Could
a joint venture be considered to be in some circumstances a
partnership, irrespective of the intentions of the parties?
b) What is a unit trust investment (managed investment) and what are the
advantages and disadvantages of a unit trust for investors?
c) Analyse and explain the importance of Section 128(4) in relation to the
company capacity to make contracts.
d) Russ and Bruce are directors of Cat Enterprises Ltd a contract
cataloguing business. Russ and Bruce are also directors of Catsoft Ltd
a cataloguing software company that is a subsidiary of Cat Enterprises.
Unbeknown to Russ and Bruce Catsoft is in financial difficulty and is
unable to pay its debts as and when they fall due. A liquidator is
appointed and claims Russ and Bruce as directors of Cat Enterprises
Ltd are liable for the failure of Catsoft.
Advise Russ and Bruce.
e) Basil is a director of Bigdeal Travel Pty Ltd (Bigdeal) a travel company
that was incorporated in December 1998. As Bigdeal mainly sells
European holidays the directors frequently hold company meetings in
Europe and on this occasion they met at the Fawlty Hotel in Torquay,
England. Basil has attended a number of overseas meetings. On each
occasion he was reimbursed his travel expenses. Due to the downturn
in travel following the Madrid bombings Bigdeal have refused to
reimburse Basil’s travel expenses of $7,000.00. It turns out Bigdeal
does not have a constitution and is uncertain whether any rules have
been adopted.
Advise Basil
(5 x 5 marks = 25 marks)
Sample Question and Answer
Is it mandatory for all companies to issue and lodge a prospectus with the
Australian Securities and Investments Commission when issuing
securities? Discuss with reasons and indicate the main role of ASIC in the
issuing of a prospectus.
(6 marks)
Answer
The general proviso is that a company limited by shares wishing to issue
securities must make disclosure and lodge a disclosure
document/prospectus with the ASIC-S718, unless the company falls within
the exemptions as listed in S708and S708A.
Securities is defined in s92 and includes share, debentures, stocks,
managed investments etc.
There are four types of disclosure outlined in s705:
-prospectus
-short form prospectus
-profile statement
-offer information statement.
The requirements to make disclosure are set out in s 704,705,706,s726
and s727.
A company will not have to issue a disclosure document/prospectus of the
issue of securities in the following situation:
1. s708(1)-(7) Small scale offering
2. s708(8)&(9) Offers to Sophisticated Investors
(i) s708 (8)(a) large investors
(ii) 708 (8)(c) includes Offers Wealthy Investors
(iii) s708(10) Offers to Experienced Investors
(iv) s708(11) Offers to Professional Investors
3. s708(12) Offers to persons associated with Co.
4. s708(13) Offers to existing Security Holders
5. s708(15)&(16) Offers for no consideration
6. Other offers that do not require disclosure
-s708 (17) to (21)
The purpose of disclosure is set out in the general disclosure test in section
710.
The company will have to lodge a prospectus with the ASIC under s718 and a
pre-vetting process is undertaken – see Notes 1-3 under s718.
ASIC plays and important role in capital raising by the powers given to it
under s741 and the various Policy statements it has made on capital raising
by companies.
For discussion of the types of information in the disclosure document see
sections 711 to 716.
If the exceptions under S708 do not apply to a company then it must make
disclosure.