A legal advice needs to be extended to Raj and Alana for the given scenarios.
Organic Wines Pty Ltd (OW) would be bound with the contract enacted with Seedy Vineyards or not under the following circumstance.
Case 1: Priya has enacted a contract with Seedy Vineyards while exceeding her authority for contract formation on behalf of OW
Case 2: The breach of objects clause highlighted in the constitution of OW
Company has separate legal entity in accordance with s.124 (1). However, it is imperative that company must appoint agents who will enact contracts with outsider parties on behalf of the company. Further, it is noticeable that some of the agents may enact contract with outsider party irrespective of the presence of requisite authority. Therefore, in such cases s. 129 Corporations Act 2001 would be taken into consideration. According to s. 129, third party can make assumptions regarding the aspect that agent is duly assigned by company and hence is enacting the contract on behalf of the company with required authority. This aspect is termed as indoor management rule and the verdict stated in Royal British Bank v Turquand case is the testimony of this aspect. Further, s. 128 would be taken into account for the exception of the assumption of s. 129 only when it is evident that third party who has entered into the contract with the agent had reasonable suspicion or knowledge regarding the authority of the agent before contract enactment. Section 125 (2) indicates that breaching of the object clause alone would not restrict the action of the company and hold it untenable. It means s. 125(2) expands the range of the action of company with the third parties irrespective of breach of objects clause as highlighted in the constitution of the company.
In the given scenario, it can be seen that Priya who is daughter of Raj and Alana is working as the managing director of OW. Here, she has made a contract with Seed Vineyards for a consideration amount of $500,000. It can be said that Priya does not have requisite authority to enact the contract with third parties for the following two reasons.
In such cases, it is essential that Priya lacked the authority to enact an enforceable contract with Seedy Vineyard.
Furthermore, she should have taken necessary approval from the board of directors before enacting the contract. However, here indoor management rule would be applicable under s. 129, as Seedy Vineyard does not have any suspicion regarding the lack of authority of Priya and hence, OW would be bound with the contract made by Priya with Seedy Vineyard. Further, it is essential to note that Priya has breached the objects clause highlighted in the constitution of company regarding the organic grapes for the wine as she enacted a contract for buying non-organic grapes from Seedy Vineyards. In this case also, the company is held liable to complete the contractual liability with Seedy Vineyards under s. 125(2) as the enacted contract is not void due to the breach of objects clause.
Therefore, it can be concluded that OW has to complete all the contractual liabilities which are raised due to the contract enactment carried out by Priya with Seedy Vineyard irrespective of the aspect that Priya lacked required authority. Further, there would be no effect incurred on the contractual liability for the case when there is breached of objects clause by Priya by ordering non-organic grapes.
According to s. 140 Corporation Act 2001, constitution of a company is an essential document which includes numerous aspect in relation with the work, contracts formation, authorities, appointment and so forth. Further, it forms the basis of contractual relations among the company members and between directors and company in regards to the clauses in the constitution. Therefore, it is imperative that each member must obey the constitution of the company and work according to the provisions of the constitution. Part 2F includes remedy in relation to the fact that a member can get issued a court order if other members of the company have behaved contrary to the interest of one member and dismiss the appointment of that member from the company without any reason rather than the dismiss clause highlighted in the constitution.
It can be said based on the given information that Ted drafted the constitution of OW and also made a clause related to him being the solicitor of OW who could be dismissed from the company only for his misconduct which is highlighted in the objects clause. However, Priya has assigned her boyfriend Carl to the position of solicitor of OW and has dismissed Ted from the position. As per s. 140, Corporation Act 2001, it is essential that all members including Priya should not harm the interest of other members as per the clauses of constitution.
Therefore, it can be concluded that Priya cannot dismiss Ted and also cannot appoint Carl based on the provision of company’s constitution as Ted has not indulged in any misconduct and therefore, she should not fire Ted. Further, if she does fire Ted then, he has the legal position to procure a court order under Part 2 F (1) against the decision of Priya.
A legal advice needs to be extended to Olive for the given scenarios
There are common law and statutory duties that are imposed on the directors of the company. An imperative duty is highlighted in s. 181 Corporation Act 2001. In accordance with this section directors of the company must exercise their power in good faith of company and also must utilize it for right purpose for the interest of shareholders. Breach of duty under s. 181 would result in civil penalties on the concerned directors as per s. 1317 E Corporation Act 2001. Further, as per s.1072 F (3), directors of the company can refuse transfer for shares only for the two scenarios which includes these two conditions which are mentioned below.
When there is absence of the above two scenarios then, the director or any other relevant authority cannot refuse to register the transfer of share. The case when any directors uses their power to do the same without the validation of s. 1072 F (3), then, it would be stated that director has used authority in an improper manner and has breached duties in accordance of s. 181. In such case, the transferee has remedies which are defined in s.10 F (1). It highlights that when directors intentionally refuse the register transfer of the shares without proper reason then, the transferee can take court order against the actions of director. If the claim of the transferee related to the decision of directors for not registering transfer of shares is true, then court would issue an order to instruct the directors to perform the registration transfer of the shares as per 1071 F (2).
It is apparent that Karim, Miles and Olive are the three shareholders of Seedy Vineyards Pty Ltd with the respective share percentage of 45%, 45% and 10%. Further, the company was not deriving significant profit and hence, was unable to pay dividends to shareholders. Thereby, Olive has decided to sell her shares. Also, both the directors Karim and Miles are having strong intention to acquire the shares of Olive but could not purchase due to the insufficient fund. Furthermore, Olive has decided to sell 5% of her shares to managing director of OW Priya. However, both the directors have refused register transfer of shares irrespective of the fact that there is no breach incurred of the conditions highlighted in s. 1072(3). However, it would be noticeable that Miles and Karim have breached the directors’ duty under s. 181 as they have restricted the register transfer for shares for Olive so that she could not sell her shares to Priya and later on, they would acquire the shares from Olive. The directors are working for personal interest and not for preserving the interest of the shareholders. Therefore, in such scenario, Olive can get issued a court order to get the registration transfer of shares as per s. 1071 F (1) and can sell the shares to Priya.
Under s. 191 Corporations Act 2001, it is essential that directors of the company must disclose the information related to the conflict of interest of the company in regards to obeying their duties in a faithful manner and in the interest of the shareholders. Also, s, 183 forbids the director from using the information received on account of their position to derive profit for themselves or associates. The breach of this duty would lead to civil penalty which is highlighted in s.1317 E Corporations Act 2001.
It can be said that on June 2, 2018, Miles was ready to purchase the 5% stake of Olive. It is because they might receive an order of tune $500,000 from the contract enacted with OW. Further, it is not essential that as a director of the company Mike and Karim must disclose the enactment of contract with OW to Olive as per s. 191 since it limits only to the shareholders. Further, s, 183 requires that directors must not earn personal profit from private information about the company which the directors are doing in this case by making attempts to purchase shares from Olive without informing her. This is apparent from the fact that rather than informing her about the contract, Karim has extended an offer to purchase the 10% shareholding of Olive and hence, is working for self-interest. This self-interest can be established since Seedy Vineyard has declared a dividend in that year five times higher than normal dividend announced in past three years. Hence, there is breach of duty of director by Karim in accordance of s. 183 and Olive has legal remedy to approach court. Further, civil penalty would be imposed to Karim on the account of breach of duty and profiting on account of private information.
Austlii, Corporations Act 2001- Part 2F https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/part2F.html
Austlii, Corporations Act 2001- Sec 1071F https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s1071F.html
Austlii, Corporations Act 2001- Sec 1072 https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s1072.html
Austlii, Corporations Act 2001- Sec 125 https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s125.html
Austlii, Corporations Act 2001- Sec 128 https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s128.html
Austlii, Corporations Act 2001- Sec 129 https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s129.html
Austlii, Corporations Act 2001- Sec 181 https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s181.html
Austlii, Corporations Act 2001- Sec 183 https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s183.html
Austlii, Corporations Act 2001- Sec 191 https://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s191.html
Jason, Harris, Corporations Law, (LexisNexis Study Guide, 2nd ed., 2014)
Julie, Cassidy, Corporations Law Text and Essential Cases, (Federation Press, 4th ed., 2013)
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