The provisions for the incorporation of a constitution of a company is laid down under the Corporations Act 2001 (Cth). Along with incorporation, it also provides the provisions to add and alter the constitution the corporation as well. The members are tied together by the constitution of the company, which also binds them regarding their dealings with their clients and third parties. Section 136 of the Corporations Act (CA) states the provision to add or alter the constitution of a corporation. While, section 136(2) of CA lays down the rules to pass a special resolution for changing the constitution of a company. However, such changes made in the constitution will not have an effect unless the regulations laid down under section 136(3) are complied with. It is to be noted that under section 136(4), a company has the power to change its constitution unless otherwise mentioned.
In the given case study, Kody and Ryder, holding 45% of shares each (total 90%, which make them the major shareholder) changed the constitution of the company, as they comprehended that Salman has been indulging in a competitor company and influencing Melanie to supply her work to that competitor company. Sensing the threat to their company, the directors (Kody and Ryder) passed a resolution, changed Astounding Gift’s constitution and added the clause of ‘buy back shareholdings’ of less than 12% from the minority shareholders at their discretion.
In Gambotto v WCP Limited, it was observed that buying back shares of the minority shareholders by the ones holding the major portion of shares for changing the constitution of the company was not permissible. The court held that it was unjust and ‘oppressive’ to buy back shares of the minority shareholders as they already hold a miniscule amount of shares, therefore buying back their shares would leave them with nothing. It was not granted by the court at the point, unless the majority shareholders could support their claim with some special purpose. It was held that buying back shares would only be permitted if it were proved that such buying back of shareholdings would save the company from material injury, monetary or otherwise. The plaintiff needed to prove that the minority shareholder would be making use of the company shares for personal interest or gain to make the court grant the permission to change the constitution.
A special resolution is the essential requisite to change the constitution of the company and such alteration needs 75% of the shareholders to vote in order to ratify such change, as per section 136 of the Corporations Act 2001 (Cth). In this case, Kody and Ryder held 90% of the total shares that judiciously allow them to pass a resolution to change the company’s constitution and add the clause of buyback minority shares, as stated by the section 136(2) of the CA 2001. In addition to, Salman held only 10% of the total shareholding, which proved to be an advantage for the majority shareholders to amend the constitution to insert the clause for buying back shares, as section 136 (3) and 136 (4) states the provision for this matter. Therefore, the action of Kody and Ryder to change the constitution of the company cannot be questioned and it is just and proper as per the provisions of the Corporations Act 2001. They can clearly prove that their action was bona fide and for the benefit of the corporation, like it was stated in Lindley MR in Allen v Gold Reefs of West Africa.
Even though the provisions of the Act allow the majority shareholders to pass a special resolution excluding the minority shareholders who hold less than 11% shares. Nonetheless, the court is always in the favour of looking into the matter whether the minority shareholders are being oppressed with the decision of the directors or majority shareholders. It is vital for the directors to prove that the intention behind changing the constitution not for oppressing the minorities, but for the best interest of the company. Therefore, the intention and purpose for the alteration of constitution is important. In the given case, Salman was secretively working with Incredible Gifts Pty Ltd, a competitor company and inducing Melanie to sell her work to that competitor company, which is completely unethical and harmful for Astounding Gifts Pty Ltd. Therefore, the principle held in the Gambotto case cannot be adhered to in this matter. Changing the constitution to stop Salman from exploiting the company is reasonable. Therefore, Salman has no claim against Astounding Gifts Pty Ltd or to its directors. He cannot sue the company as well. While, the company can sue Salman for dealing with a competitor company secretively being an employee of Astounding Gifts Pty Ltd.
Contracts that are signed before the company comes into existence is subject to the provisions laid down under section 131 of the Corporations Act 2001 (Cth). It is a mandate to abide by the provisions of such contract and perform it, although it was entered upon before registering the company. The parties are therefore, entitled to do the needful to execute the contract as well as enjoy the benefits or profits coming out of such contract as per section 131 (1) CA. However, a ratification of such contracts entered before registration of the company is required within a specified time agreed by the parties or within a reasonable time after the company is incorporated and registered. The other party to the contract would be liable to compensate the company to such pre-registration contracts if it has failed to ratify the contracts with the specified period agreed by the parties or within the time, which is reasonable enough after such company has come into existence as mentioned in section 131 (2). The party who needs to pay the compensation to another would equal the amount that the company was supposed to pay if the contract was ratified. Section 131 (3) states that if the court is convinced that the company is not ratifying the contract even after the reasonable time has lapsed after registration, then it shall direct the party to pay the whole compensation amount to the company or in parts; it might also rescind the contract and direct the parties to return the products received.
Melanie violated her exclusive contract of supplying her crafts with Astounding Gifts Pty Ltd as she stopped supplying her work to them and instead, supplied to Incredible Gifts Pty Ltd, a competitor company. However, the contract was signed when the company was named as Incredible Gifts Pty Ltd, which was changed to Astounding Gifts Pty Ltd later on while registering it officially. Ryder agreed with Melanie to pay her $5000 per month in exchange of her crafts. Astounding Gifts Pty Ltd was therefore liable to execute the contract with Melanie, which it did not. In addition to, it did not ratify the agreement as well after the company got itself registered. Thus, the company violated the provisions laid down under section 131 of CA 2001.
In the given case, Ryder will be liable to compensate Melanie as he had entered into the contract with her when the company was not registered and since then Ryder or the company did not ratify the contract within a specified or reasonable time. Melanie can claim the remaining payment of her remuneration from Astounding Gifts Pty Ltd wholly at one time or in parts. She can sue the company in case of non-payment of her remuneration.
Corporations Act 2001 (2018) Legislation.gov.au <https://www.legislation.gov.au/Details/C2017C00328>
Gambotto v WCP Ltd [1995] 182 CLR 432
Lindley MR in Allen v Gold Reefs of West Africa [1900] 1 Ch 656 at 671
Ortiz, Rafael Illescas. “Pre-contractual Liability in the Civil Law.” 2016. International Sales Law. Nomos Verlagsgesellschaft mbH & Co. KG.
Directors are endowed with several duties under the common law. In addition to, they are vested with many vital duties under the Corporations Act 2001 (Cth) which are differentiated as general and statutory duties. They are meant to execute their duties given to them and carry them out in good faith according to the common law and the statutory laws, for the best interest of the corporation. The provisions of the Corporation Act is, however, a reflection of the rules and principles of common law. Section 181 of the Corporations Act 2001 (Cth) lays down the director’s and other officers duties, which they are supposed to execute. They are liable to exercise them in good faith and intention. Their objective as a director should be to carry out their duties for the best interest and betterment of the corporation, as per Section 181 (1) of the CA. Failure to carry out the duties and responsibilities laid down in the statute would attract civil penalty under Section 1317E of the CA.
In ASIC v Rich, the plaintiff pointed out that the defendant had infringed section 180 (1) of the Corporation Act that clearly specifies the duties of the director to take reasonable care and execute their duties with diligence while exercising and discharging their powers and duties. This case talks about the business judgment rule that the statute lays down under section 180 of CA. It says that the directors may take decision based on the circumstances and for that they have the discretion to contravene certain duties for the interest of the company. Similarly, in ASIC v Adler, the directors breached several of the duties prescribed under the Corporation Act. The court proclaimed that the defendant had breached section 180 that asks a director to act with reasonable care, section 181, which requires the director to carry out their reesponsibilities in good faith and section 182 lays down the provisions against misusing the position of the director. There were violations of section 183 and 206A as well, the former discuss about the director’s duty not to misuse the information obtained by the virtue of his position while the latter talks about the duties of the director regarding financial responsibilities and assistance. The Australian Metropolitan Life Assurance Co Ltd v Ure case observed that the directors should utilize their power of discretionary for refusing the transfer of shares for valid reasons, like disallowing membership to an insolvent person, refusing a disputed member or shareholder to hold his position, and so on. In the case of Vrisakis v Australian Securities and Investments Commission, it was held by the court that if a director participates in a conduct that might harm the best interest of the company, it would not be sufficient to prove that he failed to execute his duties with care and diligence. The judges held that the whether the director has breached his duties can only be determined by ‘balancing’ the foreseeable or probable risk of injury against a potential profit or gain that can affect the company from such conduct of the director.
In this matter, Chip-Eze Pty Ltd suffered a substantial loss in their potato crisps and snacks business while it made good profit in their frozen potato chips manufacturing business. This paved the way for forming a brand new company for only producing frozen potato chips, wrapping up their potato crisps and snacks unit. They combined their assets of Chip-Eze Pty Ltd, formed a new company and named it Freeze Me Pty Ltd. They had many creditors due to the losses sustained from their previous business, so this new company would help them regain their position in the market. It is evident that they tried to evade the credits and liabilities incurred out of the previous business of potato crisps and snacks. As held in Bell Group Ltd v Westpac Banking Corporation, the directors must act bona fide for the interest of the company as the investors takes up monetary risks to provide financial support to the corporations. Therefore, to evade liabilities and credits suffered from the loss of business and opening a new business for the matter would not spare the directors from executing their responsibilities. They cannot argue before the court that they did it for the best interest of the company, as making another suffer cannot be considered ethical and reasonable to save one’s own company. It is a wrong on the director’s part to evade creditors and therefore they are to be charged under section 1317E of the CA. Thus, Archibald is advised to look into all these details of the misconduct of the directors and penalize them under the above-mentioned provision, which involves a penalty up to $200000. On the other hand, Archibald can take a bolder step by cancelling their directorship under section 206C of CA.
In Percival v. Wright, it was observed that the directors cannot be made liable to execute duty towards an individual shareholder. The directors are only vested with duties towards the corporation and not toward an individual shareholder. It was also held that a director has the liberty to buy shares from a shareholder who wish to sell his part, before the company was wound up. It was ordered by the court that such a conduct does not speak about the infringement of the director’s duties as they do not work for the interest of an individual shareholder but for the benefit of the corporation. However, the decision observed in the Percival v. Wright was not maintained in the Coleman v Myer case as in this case the court ordered that the directors do hold certain duties towards the individual shareholders. It was proclaimed by the court that the directors possess certain fiduciary duties to the individual shareholders. It was stated that the director are meant to discuss any material fact or foreseeable decision about the corporation with such individual shareholders. It solely depends on the factor that such individual shareholder have put trust upon the director to disclose the facts pertaining to his portion of shares in the company.
Section 588G of the Corporations Act 2001 (Cth) lays down that the director should not carry out insolvent trading, as it would attract him penalty for the losses incurred by an investor.
For the given matter, it is to be determined first whether Jordon had a duty toward Faizah who is an individual shareholder, only then can it be determined whether Jordon breached her duties as a director. According to the decision observed in Percival v Wright, the director has no duty toward the individual shareholder who wished to sell off his shares, irrespective of the fact that she did not know about the liquidation of the company. In the given case, although Faizah sold off her shares to Jordon, but there is no evidence of the fact that she had put her trust on Jordon for an emergency. Thus, the exception to the rule as per the Coleman v Myers is not maintainable in this matter. Jordon had no liability to disclose any material fact about the winding up of the company to Faizah. Therefore, Faizah cannot bring up an action against Jordon for not disclosing the fact about the liquidation of the corporation before buying her shares.
ASIC v Adler [2002] NSWSC 171
Australian Securities and Investments Commission v Rich [2009] 75 ACSR 1, 637 [7295]
Australian Metropolitan Life Assurance Co Ltd v Ure [1923] 33 CLR 199
Coleman v Myers [1977] 2 NZLR 225
Corporations Act 2001 (2018) Legislation.gov.au <https://www.legislation.gov.au/Details/C2017C00328>
Percival v Wright [1902] 2 Ch 401
Vrisakis v Australian Securities and Investments Commission [1993] 9 WAR 395
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