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Application of Corporation Act Law: Case Study on Truth Enterprises Ltd Assessment Answer

Question 1. 

Truth Enterprises Ltd (Truth) is a company that was incorporated in 2008. The constitution of Truth has the following stated object: 

the business of the company is to invest in online retail fashion stores”. 

Truth has three directors, Rhonda, Maria and Miranda, who together own 20% of the company’s shares. The remaining shares are split equally between four investors: Mr JJ, Mrs Cale, Mr Giuseppe and Dr Rice. 

Since incorporation, Truth has not returned a great deal of profits to members. Mrs Cale, Mr Giuseppe and Dr Rice think they have an idea to greatly enhance the profitability of Truth. They put forth a proposal at a members’ meeting that Truth should purchase a number of high-end retail fashion stores (i.e. “bricks and mortar” businesses).
Rhonda, Maria and Miranda are not keen on the members’ proposal. However, the three directors are informed that they will be removed from the Board if they do not comply with the proposal of Mrs Cale, Mr Giuseppe and Dr Rice. Although Mr JJ does not support them, Mrs Cale, Mr Giuseppe and Dr Rice have sufficient voting power together to action the removal of the three directors. Therefore Rhonda, Maria and Miranda feel compelled to act in accordance with the wishes of the 3 shareholders. 
Question 1: Answer all parts A, B, C and D

A). Identify which section of the Corporations Act 2001 (Cth) gives members the power to remove directors in a company such as Truth Enterprises Ltd (1 mark).

B). Identify which section of the Corporations Act 2001 (Cth) gives members the power to appoint a new director in a company such as Truth Enterprises Ltd (1 mark). 

C). What are the requirements to be appointed as a director? Refer to the relevant sections of the Corporations Act 2001 (Cth) in your answer (3 marks).

D). Discuss the consequences of a breach of constitutional objects for Truth Enterprises Ltd and its directors and shareholders, making reference to the relevant sections of the Corporations Act 2001 (Cth) (20 marks).

Question 2. (25 marks)

Fenner Fashions Ltd designs fashion items, including clothing, accessories and cosmetics. Fenner Fashions has three directors on its Board, and these directors are also directors of a subsidiary company of Fenner Fashions called Mean Beanies Pty Ltd (Mean Beanies). The three directors are majority shareholders in both Fenner Fashions and Mean Beanies. 
During August of 2019, Mean Beanies contracts with another company, No Sale Pty Ltd, for the purchase of goods to the value of $250,000.  In due course, No Sale Pty Ltd fails to deliver the goods to Mean Beanies, and the company does not refund any money to Mean Beanies.
The three directors of Mean Beanies decide not to commence legal action to recover the $250,000 from No Sale Pty Ltd. They simply advise: “it would not be an advisable course of action”. This decision results in a major loss for Mean Beanies that also has a serious financial effect on Fenner Fashions.

The minority members of both Fenner Fashions and Mean Beanies are concerned with the way the company is being run by the 3 directors, and so they seek legal advice.

Question 2: Answer both A and B

A). Outline the liability of the directors in terms of their duties under the Corporations Act 2001 (Cth). Have the directors breached their duties to either Fenner Fashions or Mean Beanies? (10 marks).

B). Identity the possible remedies that the minority members could seek against Fenner Fashions and Mean Beanies. Consider whether the minority members are likely to be successful (15 marks).



Question: 1


The members can remove the directors of the company by or laws rest with Section 203D of Corporations Act (CA), 2001 in case of Public Companies and under Section 203C of Corporation ACT (CA) 2001.

Therefore, the members of Truth Enterprises Ltd. can remove the directors of the Company if they are not complying with the decisions of the members. 


As per the provisions of Section 201G of Corporations Act, 2001, the resolution for appointment of directors can be passed by the members of the Company (Comapny Constitutions, 2020, pp. 12-13)

As per the Section 201H of Corporations Act, 2001, the directors with the resolution passed could easily appoint other person as director. A director can be appointed if the appointment is duly approved by the proper quorum. (Corporation Law, 2020)

Therefore, the members have the power to remove or appoint any person as director. (Australian institute of Company Directors, 2020, p. 1)

(C )

The appointment of the director is governed by the provision of Division 1 of Part 2D.3 of Chapter 1 of Corporations Act, 2001. Section 201A of Corporations Act, 2001 mandates to the companies to appoint requisite number of director. If the Company is Proprietary Company, the company shall have at least 1 director (Director and its compliance, 2020). While, in public Companies, the company shall have at least 2 directors excluding alternative director.

Section 201B prescribers the eligibility criteria for becoming a director. The person must be of 18 years of age. If the person is disqualified from managing corporations as prescribed under Part 2D.6, he can become the director on the permission granted by ASIC under Section 206F or court has granted the leave under Section 206G (Director and its compliance, 2020).

Section 201D states about the consent to be taken for acting as director. If the company doesn’t comply with the provisions of this section, the company is liable for punishment as prescribed under the provisions of the Corporations Act, 2001 by applying the principle of strict liability.

As per the Section 201E of the Act, the Company shall pass the resolutions of two or more directors separately and placed before the general meeting of the members. The resolutions must be approved by appropriate majority of members in the general meeting (Comapny Constitutions, 2020, pp. 12-13)

The director hold the office till the pleasure of the majority members as they are owners of the company. They have control on the affairs of the Company. (Australian institute of Company Directors, 2020, p. 2)

Therefore, the removal and appointment of the director shall be passed after according the consent of the members in respect of the new proposed director. If the new director is appointed by the directors, then the appointment shall be ratified in the annual general meeting of the members and approved with the requisite majority. If it is not passed by the members, the new director loses his office of director (Comapny Constitutions, 2020, pp. 12-13).


The Company “truth” was incorporated to carry on the business of the Company to invest in online retail fashion stores (Director and its compliance, 2020). The company can have the business of investing in the online retail fashion stores. As the members of the Company proposed the motion in respect to purchase of the high end retail stores (like bricks and mortar), they cannot do the business other than the object as furnished in the constitution. (Comapny Constitutions, 2020, pp. 12-13)

The constitution of the Company is contractual obligation in form of an agreement. Companies come into existence by executing the charter documents i.e. memorandum of association and Articles of Association. Company constitutions are treated as contractual force under Section 140(1) of Corporations Act, 2001 (Comapny Constitutions, 2020, pp. 12-13).

As per the aforesaid section, the company has a constitution within the provisions of the corporations Act, 2001 and it is deemed as (Comapny Constitutions, 2020, pp. 12-13)

  • Undertaken agreement with company and members
  • Agreement undertaken between the company, CS, and every director
  • Among members and other vested members 

As per the provisions of Section 136 of Corporations Act, 2001, the constitution of the Company can be adopted by following ways:-

  • ON REGISTRATION- every person who has given his consent to become the member in the company shall be required to comply with the terms of the Constitution.
  • AFTER REGISTRATION- the member can make the alterations in the terms of the Constitutions by passing of the special resolution in the duly convened general meeting.

The constitution binds the company with members, directors and company secretary or managers to perform the various duties and obligations as laid down in the provisions of the Constitution (Comapny Constitutions, 2020, pp. 12-13). The members breached their contractual obligation with the company as the constitution stipulates the procedure to alter the business clause in the Constitution. With the application of the principle of strict liability or vicarious liability, the Company can impose the punishment on the members for breach of contractual obligations with the directors or company secretaries or managers (Director and its compliance, 2020). 

Therefore the Members have power to change the main object of the company according to circumstances and current market scenario. The members strategically take the decision to achieve the maximum outcome from the plans of the company to increase the profitability of the company. (Comapny Constitutions, 2020, pp. 12-13)

Hence, it can be said that the members have the power to remove the directors of the Company by according the majority. Such removal can be done due to misconduct or any extra ordinary reasons (Director and its compliance, 2020). The Company by applying the provisions of the strict liability can held liable to the members if there is any violation in the rights of the directors. (Comapny Constitutions, 2020, pp. 12-13).


The Corporations Act, 2001outlines the duties and powers of the board of directors of the Company and they have to discharge their duties with due care and caution. There is concept of business judgment rule. According to it, the director or other officers of the company have to apply business judgment that they are complying with the duties assigned to them according to common law and equity provisions. The directors are obligated to take the decisions on: - (Duties and liabilities, p. 3)

  • Making the judgment in good faith 
  • Not having any materials interest or vested in the subject matter.
  • Inform other directors about the material personal interest and subject matter of the judgment
  • The judgment should be in the interests of the company.

Business decision could be related to the business judgment decision based on the strategic planning.’ (THE AUSTRALIAN BUSINESS JUDGMENT RULE , p. 1)

According to Section 181 of the Corporations Act, 2001,following duties can be done by directors

  • In the interest of the corporation
  • For a proper purpose

As per the Sections 182 and 184 of corporations act, 2001, the directors or other officers of the Company do any act which is detriment to the corporation. He shall be liable for civil penalty under section 1317E. If the director do any wrong acts and commits any offence which is performed recklessly and with dishonest intention, then he would be liable for criminal liability. (Australian institute of Company Directors, 2020, p. 2)

Hence, the directors of Fenner Fashions are also holding directorship in Mean Beanies and also having the major shareholding in both the companies. So they can take the appropriate decisions in the interest of the corporations. The directors have breached their duties that they are obliged to perform the duties either in Fenner Fashions and Mean Beanies.  


The companies ‘Fenner Fashions’ and ‘Mean Beanies’ are related companies as Mean Beanies is subsidiary of the Fenner Fashion. Both the companies have the same directors and hold the majority stake in the capital of the Company. 

The Companies don’t take any action against the No Sale Pty. Ltd. as that company failed to refund the amount of $2, 50,000 to Mean Beanies. The directors have to take the legal action against No sale Pty. Ltd., this amount affects adversely to the company as well as its holding company. The rights of minority shareholders are affected unfairly. As the directors have the powers to secure the interest of the both the companies and also to protect the interest of the minority shareholders. (Director and its compliance, 2020)

According to Section 11 of Part 1.5 of Chapter 1 of corporations Act, 2001, the directors are duty bound to protect the interests of the minority shareholders. If the director pursues any activity which is unfair for the interests of the Company as well as other shareholders, then they can approach the court and the court can pass order of winding up of the Company or appoint a receiver. Section 232 deals with oppression and injustice the court have wide powers to provide the compensation or damages for the loss suffered to the company as well as minority shareholders. (Statutory Exceptions to the Rule in Foss v Harbottle)

Therefore, the holding company and subsidiary company have common directors in their management; they can control the operations of both companies. They are holding the majority stake in the company, so they can act diligently and take the legal action against the defendant because of failure of amount. The subsidiary company can claim the amount from the defendant company and take the aid of court if the defendant is unable to pay the debt. They can also file the oppression claim against the majority shareholders as they were unable to secure their interests. (Oppression Claims by Minority Shareholders, , p. 1)

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