Deck 2: Company Constitution, Promoters and Pre-Registration Contracts

Question 1

Promoters owe fiduciary duties to the company, including the duty to avoid conflicts of interest.

Answer 1

True

Question 2

Mick decides to form a company called Big Wind Pty Ltd. Prior to registering the company, Mick enters into a contract purportedly on behalf of Big Wind Pty Ltd with Lotzarain Ltd. Mick subsequently registers Big Wind Pty Ltd. The contract is not binding unless Big Wind Pty Ltd ratifies the contract in accordance with section 131 of the Corporations Act 2001 (Cth).

Answer 2

True

Question 3

A person will ONLY be deemed to be a promoter if the person actively takes part in the formation of the company.

Answer 3

False

Question 4

Pre-registration contracts can never be binding because a company cannot enter into a binding contract until after it is registered.

Question 5

Passive promoters owe fiduciary duties to the corporation including, but not limited to, the duty to act bona fide.

Question 6

Shelf companies can be used by promoters to prevent contracts being binding by and against the company.

Question 7

Homer and Marge decide to form a company called Duff Enterprises Pty Ltd (Duff) to undertake a business selling beer. Before the company is registered, Homer enters into a contract on behalf of Duff with Otto Pty Ltd for the purchase of a bus. Which of the following is incorrect:

A) If Duff, or a company reasonably identifiable with it, is never registered, Homer may be liable to Otto Pty Ltd for damages.
B) If Duff was registered, Homer and Marge would both be regarded as promoters of Duff.
C) If Duff was registered and didn't ratify the contract with Otto Pty Ltd, both Homer and Marge would not be liable to Otto Pty Ltd for damages.
D) If Duff was registered, it could ratify the contract by its directors passing a resolution ratifying the contract.
E) If Duff was registered, it could issue partly paid shares providing there was nothing in its constitution limiting the issuance of such shares.

Question 8

Which of the following persons may be classified as a promoter of NewCorp Ltd:

A) David was instrumental in registering NewCorp Ltd.
B) John organized for two of his friends to invest in NewCorp Pty Ltd and helped draft the constitution.
C) Matt is a solicitor retained by David to help register NewCorp Pty Ltd.
D) Daniel takes no active part in the incorporation of NewCorp Pty Ltd but is likely to make a profit from the incorporation of NewCorp Pty Ltd.
E) All of them are promoters as the definition of the term "Promoter", found in section 9 of the Corporations Act, is very broad.
F) At most, only David, John and Daniel will be deemed to be promoters.

Question 9

Mickey and Minnie decide to form a company called Mouse Enterprises Pty Ltd (Mouse) to undertake a business selling a newly designed mouse trap. Before the company is registered, Mickey enters into a contract on behalf of Mouse with Cat Pty Ltd for the purchase of office supplies. Which of the following is incorrect:

A) If Mouse, or a company reasonably identifiable with it, is never registered, Mickey may be liable to Cat Pty Ltd for damages.
B) If Mouse was registered, Mickey and Minnie would both be regarded as promoters of Mouse.
C) If Mouse was registered and didn't ratify the contract with Cat Pty Ltd, both Minnie and Mouse could be liable to Cat Pty Ltd for damages under section 131 of Corporations Act 2001 (Cth).
D) If Mouse was registered, it could ratify the contract by its directors passing a resolution.
E) None of the above as all the above are correct.

Question 10

Isaac decided to form a company to run his business selling physics books. Isaac knows very little about corporate law matters. He went to ASIC to incorporate his company (which he wanted to call Gravity Books Pty Ltd) with him as the sole shareholder and the sole director. Unfortunately, the attendant at the ASIC office told him that the name Gravity Books Pty Ltd was already taken and he would have to come up with another name. He said he would need to think about a new name and left. For the next week Isaac thought long and hard about a new name but in the meantime entered into a number of contracts for the purchase and sale of books in the name Gravity Books Pty Ltd. While sitting under an apple tree, Isaac had an epiphany about the new name. He went back to the ASIC office and registered the company with the name Gravitation Books Pty Ltd. Which of the following is correct:

A) ASIC should have registered the company in the first instance because it is perfectly acceptable for more than one company to have the same name.
B) ASIC should have never registered the company because a proprietary company needs at least 3 directors.
C) The contracts that Isaac entered into in the name of Gravity Books Pty Ltd are most likely enforceable by and against Gravitation Books Pty Ltd provided Gravitation Books Pty Ltd ratifies the contracts.
D) It is unlikely that Isaac would be deemed a promoter of Gravitation Books Pty Ltd because at no point in time did he consent to being a promoter as required by section 175 of the Corporations Act 2001 (Cth).
E) Both (c) and (d) are correct.

Question 11

Who is a 'promoter' of a company?

Question 12

Who will not be regarded as a 'promoter' of a company?

Question 13

What are a promoter's duties?

Question 14

How should promoters make disclosure?

Question 15

What remedies are available against promoters who are in breach of their duties?

Question 16

What is a pre-registration contract?

Question 17

Why were the common law principles related to pre-registration contracts superseded by s 131 of the Corporations Act?

Question 18

What does s 131(1) provide?

Question 19

What do s 131(2) and (4) mean for a promoter's liability?

Question 20

Ronald registers a company called McDonald Pty Ltd. Ronald is the sole shareholder and sole director of McDonald Pty Ltd. McDonald Pty Ltd does not have a secretary or any other officers or employees and has no assets other than $500 in a bank account. It has no business operations. Which of the following is true?

A) If McDonald Pty Ltd does not have a constitution, the replaceable rules apply to McDonald Pty Ltd.
B) McDonald Pty Ltd has violated the Corporations Act 2001 (Cth) as all companies need at least two directors.
C) McDonald Pty Ltd is a "small proprietary company" under s 45A(2) of the Corporations Act 2001 (Cth).
D) McDonald Pty Ltd could raise capital by offering shares or debentures to a large number of people by complying with the fundraising provisions in Ch 6D of the Corporations Act 2001 (Cth).
E) Both (a) and (c) are correct.

Question 21

Jerry is the managing director of Little Boat Pty Ltd ("Little Boat"). The constitution of Little Boat provides that the managing director cannot enter into any contract with a value in excess of $100 000 without the board first passing a resolution. Which of the following is incorrect:

A) Little Boat is a proprietary company and must have at least one director ordinarily resident in Australia.
B) If Jerry entered into a contract in excess of $100 000 and the contract counterparty was aware of the limitation in the constitution, the contract would most likely not be binding.
C) ANY contract entered into by Jerry for a value less than $100 000 is binding.
D) The constitution could be enforced by Jerry as he is a director of Little Boat.
E) If Little Boat desired to take the provision out of the constitution, at a minimum, it would need to pass a special resolution.

Question 22

How does a company change its rules?