LAWS7023 – Corporate Law
Internal Rules, Company Organs, Corporate Liability (Textbook – 11 - 13)
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Internal Rules
 Govern a company’s “internal” relationships between members, officers, and the company itself
o (s140 – “Has effect as a contract”).
 Regulates operation of company. I.e. Director appointment, winding up, paying of dividends, etc.
 Statutory Provisions s134-136 grant companies three options for internal governance.
Section 134
A company’s internal management may be governed by provisions of this
535
Act (s134) that apply to the company as replaceable rules (s135), by a
constitution (s136) or by a combination of both.
Replaceable Rules
Section 141
538-540
 Operate as default provisions in absence of respective rule in
company constitution.
 Provides rules for:
o Directors + Director Meetings,
o Member Meetings,
o Company secretary,
o Inspection of Books, and
o Shares + Transfer of Shares.
 Replaceable rules apply to every company registered after July
1998 unless opted out by members in adopting constitution. Except
to a proprietary company that has the same person as sole director
and shareholder (s136).
Constitution
Section 136
537
 Provides rules for adoption and modification of Constitution.
Section 9
594
 Constitution can be altered by special resolution
o Must have 21 Days prior notice and,
o “Intention to move” resolution.
o Must be passed by 75% of:
 Actual votes cast by,
 Members entitled to vote.
Limits to alteration of internal rules
Statutory limits
Modification to internal rules:
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 Cannot, without member consent, require a member;
o To Take up more shares,
o To Increase their liability to the company,
o Restrict right to transfer shares;
 Must comply with other related requirements in constitution;
 Alter special rights of members; and,
 Cannot be oppressive.
General Law limits
If an alteration involves removal of important membership right, or shares
545
of a member are to be acquired without a members consent, then the test
of fairness laid down in Gambotto’s case must be satisfied.
Gambotto’s Case
Members
 Company majority shareholders wanted to buy out minority
Rights
shareholders
 Minority Shareholders did not want to sell
 Company majority shareholders passed special resolution altering
constitution to give power to allow themselves to buy out minority
shareholders without consent.
 Courts found this to be unfair in the circumstances
(procedural/substantive) ruled against company.
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LAWS7023 – Corporate Law
Breach of Constitution or Replaceable Rules
 Not itself a contravention of Corporations Act
o No Civil and/or Criminal Penalty
 General Law enables company to enforce statutory contract (Internal Rules).
o Hickman v Kent (1915).
 Outsiders (non-members) cannot obtain rights nor enforce provisions under constitution.
Hickman v Kent or
Romney Marsh SheepBreeders’ Associtation
(1915) 1 Ch 881



Association constitution states that disputes between members and
association are to go to arbitration before court.
Member (Hickman) wanted to go to court over Association refusal
to register his sheep.
Court judgement rules in favour of company constitution -> must
follow constitution (arbitration) as it forms a binding contract.
547-548
548
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LAWS7023 – Corporate Law
Meetings
Directors’ Meetings
Convening
 Proceedings of directors’ meetings are governed primarily by the internal rules, and also:
Section 191
Directors must give other directors notice of any material personal interest
in a matter relating to the affairs of the company.
Section 195
Rights of directors in s191 are restricted in regards to consideration of being
present or voting at a meeting.
Section 251A
 Minute books are to be kept and signed
 Records of proceedings and resolutions
Section 248D
Use of Technology
 A directors meeting may be called or help using any technology
consented to by all directors.
 Check internal rules for further details.
Section 248C
 Any director can convene (unless overwritten by constitution)
 Notice of meeting must be given to all directors.
 Notice period is 21 Days prior to meeting (unless contrary to
constitution).
Voting
Section 248G
 Resolutions must be passed by majority of directors entitled to vote
(may include Chair).
 Directors under s195 are excluded.
Quorum
 Minimum number required to be present before meeting can proceed
Section 248F
Minimum of two directors unless determined otherwise
Resolutions
Section 248A
Directors may pass a resolution without a meeting if all directors entitled to
vote sign a document stating they are in favour.
Section 248B
Single Director companies
 Director pay pass resolution by recording and signing the record –
Declaration.
Members Meetings
Annual General Meeting
 See flowchart Page 598 – Summary
 Only public companies with more than one member must hold a AGM.
 Consider financial statements and directors reports (s317) plus appointment and remuneration
of directors and auditors
 Held once a year within 5 months of the end of the companys’ financial year (s250N)
 Ordinary resolution
o 50% of members present and entitled to vote to pass
 Quorum
o Two members present at all times
 Voting
o Either one vote per member , or one vote per share
Topic 13
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Slides
19 - 23
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LAWS7023 – Corporate Law
Corporate Liability
Liability of Companies for Contracts
How does a Company
Directly
execute a contract?
 Through “organs” who are seen as directing the “mind and will” of
the company (s127).
o E.g. Board of directors, members in AGM
o See below – directing mind and will.
Indirectly
 By agents acting on its behalf and with its authority (s126).
o E.g. Directory, manager, company secretary
 Actual Authority
o Express: If a contract has express authority of the agent or
official – it is binding and enforceable. e.g. stated in internal
rules, or resolution.
o Implied: Associated authority with “that kind of position”
which carries certain implied powers.
 Apparent Authority
o Company has “held out” or represented that a particular
person has authority to act on its behalf.
o Must be representation + reliance + credit: Freeman &
Lockyer v Buckhurst Park Properties (Mangal Ltd (1964).
o Representation must be “by the company”: Crabree-Vickers
Pty Ltd v Australian Direct Mail Advertising and Addressing
Co Ltd.
Topic 13
555
Slide 4042
If there is a break in the chain of Actual Express Authority then a contract
may still be binding if either of the following are met:
1. Section 129 Assumptions
2. Turqands Case
3. Implied/Apparent Authority
Section 129
A person dealing with the company may assume (s128-1) the following
statutory assumptions have been complied with.
560-561
Statutory Assumptions
1. Companies constitution and relevant replaceable rules have been
complied;
2. Person named in the ASIC public records has been:
a. Duly appointed,
b. Customary authority of directory or company;
3. Person held out by company:
a. Been duly appointed,
b. Customary authority of that kind of officer of similar
company;
4. Officers and agents have properly performed their duties to the
company;
5. Document has been duly executed by the company if signed without
seal;
6. Document has been duly executed by the company if the document
signed with seal;
7. Officer of agent has authority to warrant authenticity of documents.
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LAWS7023 – Corporate Law
Turqand’s Case
“Indoor Management Rule” – General Law
 “Persons dealing with a company in good faith may assume that acts
Royal British Bank v
within its constitution and powers have been duly performed and
Turquand (1856) 119 ER
are not bound to inquire whether acts of internal management have
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been regular…”
 That is – Persons dealing with the company are not effected by
irregular internal activities of the company in regards to following
constitution and duties and do not need to enquire as such.
Section 128-4
Restriction on power to assume
 A person cannot make an assumption they knew or suspected is
incorrect.
 Objective test
Liability of Companies for Tort
Tort Organic Theory (Primary Liability)
 A company may be liable where people who act for the company and who commit a tort are
acting as the organ of the company. That is – the “brain”, “the directing mind and will” of the
company. Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1991).
 E.g. the Board was acting within their legal/contractual authority, or the Members voted in a
general meeting to pass a resolution, or some other person is the “directing mind and will”.
 If the directing mind has committed a tort, the company will be liable: Lennard’s Carrying Co
Ltd v Asiatic Petroleum Co Ltd (1915).
568
Slide 46
570
Slide 2931
Tort Vicarious (Secondary) Liability
 The wrong has been committed by a natural person, i.e. an agent or employee of the company.
 If a negligent act is committed by an employee acting in the general scope of their
employment, the employer will be held liable for damages: Holis v Vabu Pty Ltd.
 Damages in facour of a company can be reduced on the grounds of contributory negligence by
the company, where directors of management were negligent: Daniels v Anderson (1995).
Teco Supermarkets v
Nattrass (1972) AC 153
Directing Mind and Will
 Individuals with such a high degree of responsibility for that
management of the company that they could be said to be acting as
the corporation rather than for the corporation



571
Slide 32
Washing powder incorrectly advertised price at Teco Supermarket.
Customer complaint, takes it to House of Lords.
Ruling: Branch manager was not an organ of the company therefore
acts of the manager could not be attributed to the company itself.
Criminal Liability of Companies
Criminal Organic Theory (Primary Liability)
 Criminal law requires a guilty mind (mens rea) – intention to do something wrong knowing the
act is unlawful.
 Under organic theory, necessary to establish intention of the “directing mind and will” (organ).
S&Y Investments Pty Ltd v Commercial Union Assurance Co of Australia Ltd.
 Issues with organic theory
o Most decisions made at middle management, organic theory focuses on senor
members of the corporation as a whole.
o Difficult to establish specifically who the directing mind and will of the company really
is.
570-572
Slide 33
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LAWS7023 – Corporate Law
Meridian Global Funds
 Imposed liability on company not employee for failure to notify a
Management Asia v
share acquisition, despite employee in question not the company’s
Securities Commission
“directing mind and will”
Criminal Vicarious (Secondary) Liability
 “Stricter” form of liability. Areas include: drugs, liquor licensing, occupational health and safety.
 “Level” of the employee who commits the wrong is irrelevant provided the wrong was
committed in the scope of employment.
 Criminal liability imposed without requirement to prove the existence of intention. – No need
for mens rea.
 No defence available once unlawful act is proved: Mousell Bros Ltd v London & North Western
Railway Co.
 Where mens rea element is required to establish an offence, companies can expect to avoid
liability: Presidential Security Services of Australia v Brilley.
572
Hamilton v Whitehead
(1988)
Slide 37
Macleod v R (2003)
Accessories
 An individual who physically performed the criminal act may be
liable as an accessory to the crime.
 Thus, both company and wrong-doer may be liable
Crimes against the Company
 A company will not necessarily be liable to crimes committed
against it by those who are its directing mind and will.
573
Slide 38
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