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Guided answers provided by Marina Nehme and Margaret Hyland

Chapter 19: Members Remedies
Revision Questions
1. How do you determine whether someone is a member of a company?
See 19.7. A person is considered to be a member of a company, if the persons
name appears on the companys member register: s 231.
2. How can a member enforce a breach of directors duties?
Members have a number of remedies at their disposal. A member may enforce
a breach of directors duties through:

See 19.519.14: derivative action: Under s 236, the members may take
action in the companys name against the directors for breach of their
directors duties. However, to commence such an action, the member
must firstly obtain the courts permission: s 237.
See 19.15: statutory injunction: Section 1324 notes that the court may
issue an injunction to stop a person from engaging in conduct that is a
breach or would be a breach of the Corporations Act. There are different
authorities in case law regarding the possible use of s 1324 by members,
when taking action in relation to directors duties. In Smolarek v Liwszyc
[2006] WASCA 50, the Western Australian Court of Appeal noted that a
member could apply for an injunction in relation to an alleged breach of
directors duties. However, in the Queensland Court of Appeal case of
McCracken v Phoenix Constructions (Qld) Pty Ltd (2012) 289 ALR 710,
the court held that to allow a breach of directors duties to be enforced
under s 1324(10) would be to circumvent the purpose of the civil penalty
regime in Pt 9.4B.
See 19.22: oppression: If there is a breach of directors duties, members
may sue under s 232, because a breach of directors duties may lead to
oppression.

3. What remedies may a member seek in respect of a breach of the

companys constitution?
See 19.4. A member has a number of remedies at their disposal. Section 140(1)
allows members to take action in respect to a breach of the companys
constitution. Under s 140(1), the corporate constitution is a contract between:

The company and its members:

These parties can enforce the rights contained in the constitution. For
example, if the company is not complying with a clause in the constitution in
relation to the rights of the members to vote, then the company will be
breaching the constitution. As the constitution is a contract between the
member and the company, the member may enforce the statutory
constitutional contract and stop the company from acting in such a way. In
Hickman v Kent or Romney Marsh Sheep Breeders Association [1915] 1
Ch 881, the Sheep Breeders Association had a constitution that stated that
any dispute between the company and the members would be solved
through arbitration. A dispute arose because Hickman, who was a member
of the company, was expelled from the association. As a result, he started a
legal proceeding against the company complaining of various irregularities
in the affairs of the association. The company wished to rely on the
constitution to stop the proceedings and solve the matter through arbitration.
The court agreed with the company and noted that the statutory
constitutional contract was enforceable by the company against the member
because the constitution is a contract between a company and its members.
As a consequence, there was a stay of the legal proceedings and the matter
was sent to arbitration.
However, it is important to note that the constitution is not always a contract
between the company and the members. It is a contract only in the cases
where the constitution affects the member in his/her capacity as a member
and not in his/her capacity as an outsider. Accordingly, the question that
would be asked is: Does the constitution give the member a right that
comes with the shares or not? If it gives a right that comes with the shares,
then the constitution is a contract between the company and the members.
If it does not, then it would not be a contract. For example, in Eley v Positive
Government Security Life Assurance Co (1875) 1 Ex D 20, Eley was a
member in the company. The companys constitution noted that he was also
a solicitor of the company. Eley worked as the companys solicitor for a
period of time. However, the company stopped employing Eley to do the
legal work of the company. He sued the company, arguing that it was in

breach of its own constitution because it was not complying with the clause
stating that Eley was the companys solicitor. The court noted that a
constitution is a contract between the member and the company, and since
Eley was a member, the constitution may be considered a contract.
However, the court also noted that it needed to check if the constitution
affected Eley in his capacity as an outsider or in his capacity as a member.
Is becoming a solicitor in the company a right which comes with shares?
The answer was no: the right of being a solicitor does not come with the
shares. As a result, the constitution was held not to be a contract between
Eley and the company. The employment clause could therefore not be
enforced.

The company and its directors and company secretaries: The constitution is
a contract between the company and its directors and company secretaries.

Member and member: The constitution is a contract between member and

member.

Accordingly, members may take action under s 140(1) for breach of the
constitution against the company or other members, if they fall under either
s 140(1)(a) or (c).
4. Explain the difference between a members personal rights and
company rights.
See Introduction and 19.119.4. Members personal rights are the rights given
to members on acquisition of shares in the company, such as voting rights, a
right to dividends and a right to attend meetings.
Companys rights are the rights given to the company and they are not
available to members. For example, it is the company, and not the member,
who has the right to take action against a director for a breach of directors
duties.
5. How does the court satisfy itself that it is just and equitable to wind up
a solvent company?
See 19.1619.21. There are a number of grounds that may support a just and
equitable winding up order, including:

justifiable lack of confidence in the management of the companys affairs;

breach of equitable obligations;

fraudulent or oppressive conduct;
management deadlock; or
failure of substratum.

In Re Wondoflex Textiles Pty Ltd [1951] VLR 458, unfair conduct by the
governing director, such as job dismissal and false accusations against a minor
shareholder, supported the minor shareholders claim to having a justifiable
lack of confidence in the management of the companys affairs. This was
sufficient to support a just and equitable winding up. Also, the court found that
the capital structure of the company a small number of shareholders with the
residual discretion in directors to refuse entry to new shareholders was
analogous to a partnership (following Re Yenidje Tobacco Co [1916] 2 Ch 426).
This further supported a just and equitable winding up, as the managing
directors could not be trusted to run the company fairly in the future.
6. What is the meaning of good faith in s 237(2) (SDA)?
See 19.10. In Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313,
the New South Wales Supreme Court considered that there were two
interrelated factors involved, when establishing good faith for the purposes of
s 237(2). These are:

whether the applicant honestly believes that a good cause of action

exists and has a reasonable prospect of success; and
whether the applicant is seeking to bring the derivative action for a
collateral purpose, which would amount to an abuse of process.

7. How does the court establish unfair prejudice or unfair discrimination?

See 19.26. Under s 232, prejudice and discrimination relate to the notion of
conduct that adversely affects the interests of the member making the
application. The conduct must be more than merely preferring one group of
members over another group: Ngurli v McCann (1953) 90 CLR 425; Mills v Mills
(1938) 60 CLR 150. The prejudice or discrimination must be unfair, particularly
where the constitution expressly allows directors to prejudice or discriminate
against members for the benefit of the company. The court makes an objective
assessment of whether a reasonable business person would consider the
conduct to be commercially fair and reasonable: Morgan v 45 Flers Avenue Pty
Ltd (1986) 10 ACLR 692.

8. When can a statutory injunction be used to provide a member with a

remedy?
See 19.15. A statutory injunction under s 1324 allows the court to issue an
order to stop a person from engaging in conduct that is a breach or would be a
breach of the Corporations Act. The applicant for an injunction must satisfy the
court that he or she is a person whose interests are affected, which the courts
have held to be interests going beyond the mere interest of a member of the
public: Broken Hill Proprietary Co Ltd v Bell Resources (1984) 2 ACLC 157.
There are different authorities in case law regarding the possible use of s 1324
by members, when taking action in relation to directors duties. In Smolarek v
Liwszyc [2006] WASCA 50, the Western Australian Court of Appeal noted that
a member could apply for an injunction in relation to an alleged breach of
directors duties. Provided a member can show that the conduct affects their
interests, then they may obtain an injunction or damages under s 1324.
However, in both Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39
NSWLR 128 and McCracken v Phoenix Construction (Qld) Pty Ltd (2012) 289
ALR 710, the courts held that s 1324 should not be used by members to
enforce directors duties, as the civil penalty regime provides a complete code.
Therefore only the company or ASIC can enforce such duties.
9. Explain the principle of fraud on the minority. How is it different from
minority oppression?
See 19.2. Fraud on the minority is based on the principle that majority members
cannot exercise their votes in a way which falls outside the reasonable scope
for which the right to vote was conferred on the members. Therefore, the
majoritys vote will be void in law, if the power to vote is used for a purpose for
which it was not given. This is considered an improper purpose. In Ngurli v
McCann (1953) 90 CLR 425, the court held that even though members can
exercise their power to vote for their own benefit, this power is limited, as it
must still be exercised in the manner required by law and also used bona fide
for the benefit of the company as a whole. In Peters American Delicacy Co v
Heath (1939) 61 CLR 457, the rationale for the limitation was expressed as a
check on broad powers, such as the power to alter the constitution, to prevent
the exercise of the power, which appears to be an authorised use but in reality
is a means of securing some personal or particular gain, which is unfair being
outside or inconsistent with the contemplated objects of the power.

See 19.22. The minority oppression remedy is a statutory remedy found in Pt

2F.1 of the Act. The key provision is s 232, which is broadly defined by the
courts. The remedy was introduced into the Act to provide more flexible
alternatives for problems associated with the exploitation of minorities than the
just and equitable winding up remedy, which was considered to be too harsh for
solvent companies. The minority oppression remedy applies to persons in their
capacity as a member or otherwise. However, an application for court orders
under s 234 is limited to those, who are, or were, members.
10. When is it not permissible to alter the corporate constitution?
See 19.219.3. A companys constitution may be altered through passing a
special resolution in a members meeting. However, it is not permissible to alter
the companys constitution, if:

the change of the constitution is oppressive (s 232); or

the two-stage test in Gambotto v WCP Ltd (1995) 182 CLR 432 is not
complied with. In this case, WCP changed its constitution to add a
clause that allowed its majority shareholder, Industrial Equity Ltd, to
compulsorily expropriate the shares of the minority shareholders. This
alteration was justified by the bidder on the grounds of potential taxation
and administrative cost savings. Gambotto owned 0.1 per cent of the
shares in WCP Ltd and brought an action against such an alteration of
the constitution.
The High Court held that an alteration of a constitution, in relation to the
expropriation of shares owned by minority shareholders, will only be
valid, if it can be proved that the change is:

for a proper purpose:

The first limb of the Gambotto test requires that the substantial
purpose of the alteration to the constitution must be to protect the
company from significant detriment or harm. Examples of the
satisfaction of this test would be where:
o the minority shareholder is competing with the company:
Sidebottom v Kershaw [1920] 1 Ch 154;
o expropriation is necessary to allow the company to comply with
regulations in order to carry on its business. For example, a
proprietary company cannot have more than 50 non-employee
shareholders: s 113(1). This means that if the proprietary

company has 52 non-employee shareholders, it is breaching the

legislation. As a result, it would be a proper purpose for the
company to amend its constitution to allow the expropriation of
the additional shares.
Purposes that will not be considered to be proper are to secure or
advance:
o a new corporate structure;
o a new commercial advantage;
o the interests of the company as a legal or commercial entity;
o taxation benefits; or
o administrative benefits;

fair in all circumstances:

Fairness involves two elements. Firstly, the process of the
expropriation should be fair. To ensure this takes place, there should
be full disclosure to members of all the information that is relevant to
the alteration. Secondly, the price paid to expropriate the shares
should be fair. Accordingly, if the price is less than the market value
price, it may be considered unfair.