Chapter 4 – Constituting Companies (Mini summary relevant for Chapter 22 – Transacting by Companies 1) Legal effect of the internal governance rules s140 states that: “a company’s constitution (if any) and any replaceable rules that apply to the company have effect as a contract: a) Between the company and each member b) Between the company and each director and company secretary c) Between a member and each other member Under which each person agrees to observe and perform … the rules so fas as they apply to that person”.
Enforcing the internal governance rules First, s140 is limited in that it provides for the internal governance rules to have effect as a contract only between certain persons. So: • The internal governance rules to not operate as a contract between a member and officer. • The internal governance rules cannot be enforced by outsiders: Eley v Positive Government Security Life Insurance Co Ltd Second, to the extent that s140 confers rights or obligations on a member, it does so only if (and while) the person is a member and only in their capacity as a member.
Applicants for membership may be unable to enforce the statutory contract until they are registered as members: Bailey v NSW Medical Defence Union Ltd Third, a member cannot enforce compliance by the company with a procedural requirement in the internal governance rules where failure to comply with that requirement can validly be excused by member majority in general meeting. (See Ratification in Chapter 14) Fourth, a members rights to enforce the internal governance rules under s140 may be limited to those of the rules that confer rights that are personal to the member in its capacity as such. Eg. The right conferred under the replaceable rules in s250E would be an example of such a right) Consequences of not observing the internal governance rules (Relevant Part to Chapter 22) Part 2B. 4 is drafted so that the replaceable rules act as contractual terms binding on a company, its members and officers only by operation of s140 and not by force of law. • Failure to comply with the replaceable rules that apply to a company is not of itself a contravention of the Corporations Act. This means that criminal liability, civil liability and injunctions do not apply: s135(3) If a provision of a company’s internal governance rules (either RR or constitution) have not been observed, the following may result: • In the case of non-compliance by the company, a member may be able to obtain a declaration or injunction requiring the company to comply, provided the rule is one that a member can enforce on the principles set out above. o A director or secretary may also be able to enforce the internal governance rules on this basis. In the case of non-compliance by a member, another member or the company may be able to obtain declaratory ot injunctive relief, or damages • In the case of non-compliance by a director or secretary, the company may be able to obtain declaratory or injunctive relief, or damages.
A company’s constitution may include restrictions on its objects If a company acts outside its stated objects, or breaches a restriction or prohibition on the exercise of its powers contained in the constitution, • THEN THE ACT IS NOT INVALID But those participants that caused the company to breach its constitution may be liable to other participants in the coy. Non-compliance with the internal governance rules may amount to procedural irregularity In cases of procedural irregularity, s1322 applies. s1322 has the effect that a proceeding under the Corporations Act is not invalidated because or any procedural irregularity unless: • The court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by any order of the court, AND • The court by order declares the proceeding to be invalid (see Chapter 7 for more info! Case Eley v Positive Government Security Life Insurance Co Ltd – the company’s articles of association (constitution) stated that Mr Eley should be the company’s solicitor. When the company ceased to employ him as its solicitor, he sued to enforce the relevant article under the predecessor to s140. • He failed, as the statutory contract is a deemed contract only as between the parties referred to in the section ???? Chapter 5 – Managing Companies Definitions
Organic theory of the company – recognition that the company acts through the board with respect to some matters and through members in general meeting with respect to others. Ordinary resolution – votes cast to accept of the resolution represent >50% of all votes cast by members present and voting (proxy) Special resolution – s9 motion passed by at least 75% of votes cast by members entitled to vote (in person and by proxy) Corporate Governance an expression used to describe a company’s management practices that encourage transparency, accountability and allow for effective use of membership rights. important contributor to investor protection) • Rise to authority as: company’s internal governance (IG) rules set out in constitution or RR in CA 2001 Rules Directors’ power of management Also, under common law (p 109-111) • Members cannot override decisions of the board; Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame (p109). o Also in John Shaw & Sons (Salford) Ltd v Shaw (p110) • Members cannot call/requisition meetings of members to pass resolution relating to a matter within the power of the board, even where the intention of the resolution is to merely express a non-binding opinion/request; NRMA Ltd v Parker (p111). Directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and … the majority of shareholders cannot control them in the exercise of these powers while they remain in office: Howard Smith Ltd v Ampol Petroleum Ltd If members disagree with a decision of the board, they may (p111) • Remove the directors from office in all public co. s (s203D) • Remove the directors from office in a proprietary company if the RR in s203C hasn’t been replaced in the constitution • Where they have the power to appoint new directors (RR s201G) members may replace directors with those who are amenable to the members’ wishes o s249D – directors must call meeting is requested by atleast 5% of votes or 100 members o RR s249F – member may call and arrange to hold a meeting. Member must pay (see Chapter 7) • Alter the company’s IG rules (by special resolution: s9) to restrict the directors’ power to act without first obtaining member consent: s136(2).
Member’s decision-making powers Generally member approval is most likely required for constitutional decisions/decisions that impact differently on different catagories of members. Members’ residual decision-making powers (p 112-114) • Where the board is unable to act. Eg: o Deadlocked or below quorum: ie appoint additional directors (Barron v Potter). o Where the board falls below quorum, the general meeting is given power deal with the matter; s195(4)
