In the first case the company, Astounding Gifts Pty Ltd, changed their company constitution which led to discretionary purchase of 10% shareholding of Salman by the company. This part of the assignment would try to advise Salman in preventing the new clause inclusion for the prevention of the shares expropriation. The directors of the company, Kody and Ryder, decided that they would provide 10% shares of the company to Salman through the employment contract. Later they found out that Salman has also accepted a position as accountant in the rival company Incredible Gifts Pty Ltd. The directors also had the information that Salman has also tried to persuade Melanie, supplier of handmade gift, for the Incredible Gifts Pty Ltd. Previously Astounding Gifts Pty Ltd got into a contract with Melanie to supply the products against a monthly payment of $5000.
The advice would first discuss the constitution change process in a business organisation. In the business legal term a constitution is the contract between director and company, member and company, company secretary and company, each other member and a particular member. The legal requirement is that a company can go for adoption of a constitution before or after of the business registration process. There is two separate approach of the constitution adoption process. Before the registration process the member must in writing agree to the constitution’s terms whereas after the registration the adoption process would be done through a special resolution. All these approach of constitution adoption is done as per the ‘Corporations Act 2001’. This law again state the detailed procedure of changing the constitution. This repealing or changing of the constitution is done through the same special resolution process. In this case the special resolution must have a notice period of 21 days and 28 days for the general companies and public limited company respectively. After this process the voting procedure is discussed in this act and there it is stated that 2/3 majority in favour of the resolution would be required for the adoption of the resolution.
In the current context of Astounding Gifts Pty Ltd the resolution has been passed in hurry and no mention of prior notice of 21 days is visible. This could be the main objection that can be put forward to prevent the inclusion of the less than 12% shareholding status expropriation. This would prevent the implementation of this clause immediately and would ask for due procedure to be followed for this procedure. At that time the next crucial argument for defence would be the 2/3 or the 75% voting in favour of the resolution. At the moment the passing of the resolution does not show the required 75% mandatory in favour votes. Inability to have 75% vote in favour of this resolution would mean that the current resolution would not be adopted.
In the current case of Melanie, a duly signed contract was made where Melanie supposes to provide certain handmade gift or crafts to the Astounding Gifts Pty Ltd and in return they would provide $5000 to Melanie every month. Melanie stated the supply process for the Astounding Gifts Pty Ltd. Meanwhile Astounding Gifts Pty Ltd was approached by the Incredible Gifts Pty Ltd for the same supplies. After this incident Astounding Gifts stopped their payment to Melanie.
Considering the situation of Melanie, the situation can be viewed as the actual breach of contract. As per the actual breach of contract, when a party does not intentionally stop performing their side of duty as time comes through the other side has been able to fulfil their side of agreement. This common form of breach of contract can have different legal remedy to be given. One of the simple approaches that can probably solve the situation for Melanie is the direct sorting process of the problem with the appropriate authority of Astounding Gifts Pty Ltd. In this approach Melanie can approach the director of Astounding Gifts Pty Ltd to resolve the situation and ask them to fulfil their contract agreement. The reasonable arguments under this approach can have proper resolution. But there are situations when the problem is not resolved under this approach.
Under this type of cases the company must provide proper oral and written explanation for this incident. But from Astounding Gifts Pty Ltd, Melanie did not receive any explanation for the stop of payment. In the current situation the actual breach of contract is quite visible. One of the recourse for the current breach of contract is the damages provision. Melanie under the current circumstances can demand for the mental harassment from this situation. Melanie can avail the option of ‘liquidation claims’[5]. Here certain sum of money must be agreed upon signing the contract to be payable if any party breaches the contract. If such clause was there in the contract Melanie can certainly ask for that.
According to the Section 181 of the Corporations Act of 2001 any director or manager of an organisation or business establishment must discharge their duties and responsibilities in a good faith which would act in the best interests of the corporation and at the same time must be for a proper cause or purpose. The aspect of good faith has been given the highest levels of importance within the law as it helps in ensuring there is more accountability among the managers and directors of an organisation. The managers must not have any material personal interest in the subject matter of the business decision making and they must inform themselves about the subject matter of the judgment to the extent that they reasonably believe to be appropriate. The directors and managers must also believe that their decisions are in the best interest of their organisation.
From the case scenario given before us, it can be seen that the directors of Chip-Eze Pty Ltd. has taken a logical and rational decision which was in the best interest of their organisation. Chip-Eze Pty Ltd was already having a lot of financial difficulties and they have been unable to make payments to their creditors who were mainly the suppliers those who were involved with the snack food side of their business. The company was not doing well in their business for quite some time. Their business was divided into two segments – one involved the manufacturing of potato crisps and other snack foods (which was the loss making segment of their business) while the other involved the manufacturing of frozen potato chips and other foods (which was doing reasonably well in the market and was earning the necessary profits for ensuring the normal sustainability of their business. So, the management organised a board meeting on 1st August, 2018 where Michaela proposed to create a separate company by the name of Freeze Me Pty Ltd wherein the profitable frozen foods section of their business would be completely transferred. This proposal was readily accepted by the board members and passed unanimously. Freeze Me Pty Ltd was incorporated on 10th August, 2018 and all the assets of the frozen foods division of Chip-Eze Pty Ltd were transferred to this company. The directors demonstrated a high amount of responsibility by clearly informing about the changes to their customers and suppliers. But the creditors of Chip-Eze Pty Ltd had not been duly paid by the organisation before the management decided to switch over their business to Freeze Me Pty Ltd. Therein lies the fault of the managers which clearly demonstrates the lack of accountability and responsibility towards their creditors. This clearly points to a breach of the duties of mangers under Section 181 of the Corporations Act of 2001 (Cth) and as a result the company is liable to pay a penalty or compensation to their creditors who have not been paid their dues.
Section 181 of the Corporations Act of 2001 clearly mentions the aspect of managers exercising their powers and discharging their duties in good faith which would be in the best interest of the organisation but cheating the creditors would not provide a good name to the organisation and it would invariably tarnish and compromise the brand image and reputation of Chip-Eze Pty Ltd in the market. Thus, it can be concluded without any doubt that the managers have failed to carry out their duties in a responsible manner and as a result the managers of Chip-Eze Pty Ltd are liable to face penalties.
The fact that the breach of the duties and obligations of the managers under section 181 of the Corporations Act of 2001 gives rise to civil obligations so it would also invite civil penalties. The provisions of the civil penalties would invariably be decided by the courts which in worst cases can force the managers of Chip-Eze Pty Ltd to pay a monetary compensation to their creditors which would satisfactorily cover for their losses. The Corporations Act 2001 also sets out criminal offences in those cases where a director has been found to act in a reckless and irresponsible manner or is found to act in a dishonest manner deliberately resulting in their failure to exercise their powers and duties; they are liable to face criminal prosecution for their actions.
In the current context the case it can be seen that Faizah showed her interest to buy additional shares in the Chip-Eze Pty Ltd. Jordon being one of the directors of the business agreed to sell 5% of the company shares to Faizah. The transaction was completed but after some time the inability of the Chip-Eze Pty Ltd to repay the creditors lead to insolvency of the company by the order of the court. Under this situation one case could be the withholding of facts from Faizah by Jordon which led to loos for Faizah.
The s181 of the Corporations Act 2001 (Cth), can be a support in this situation. As per this act there are certain duties for the directors to be followed at the time of work. The law clearly stated that the director needs to fulfil certain duty while making some judgement regarding the business. One of the duties is the proper purpose and good faith at the time of making some important judgement for the business. The duty further states that the judgement made by the directors should not have the self interest related with the situation. The directors from their reasonable believe point must inform them about the time of judgement regarding the subject matter. The judgement of the director must have a belief from the directors that the decision would be best interest for the company. These are the formal duties that are explained in the legislation. But additionally there could be some other duties also for the directors. The directors at the time of fulfilling their duty must not engage in any capacity that may lead to person advantage or other advantage or a detrimental situation for the company. This duty comes under the s182. Then in the s183 the legislation also states that the directors must not use the information obtained just by being in a advantage position in the organisation, for person advantage or other advantage or a detrimental situation for the company.
These duties provide some opportunity for Faizah to apply the action against Jordon at the time of share deal. One of the applicable duties under the current situation is the good faith and proper purpose duty of the directors. Jordon being the director of the company had the privilege to have the proper knowledge about the solvency situation of the business. At the time of selling the shares Jordon did not showed good faith by providing the proper information to Faizah about the business situation. The purpose was not proper here as Jordon tried to sell off some the shares to liquidate some of his money. Here the s183 is also applied as in the current situation where being the direct of the company Jordon had these sensitive information about the insolvency situation of the business . This information were used by Jordon to benefit himself and quickly took the offer of Faizah and sold 5% shares. This act in his personal interest is totally against the director’s duty.
Under this situation Faizah have the right to ask for penalty Jordon. The civil penalty provision of the legislation states that. Under the part 9.4B the pecuniary penalty of $200000 can be demanded or may be asked to compensate for the loss that has been incurred by Faizah because of this information withholding.
References
Bosch, H. (2002). The changing face of corporate governance. UNSWLJ, 25, 270.
Davis, G. (2003). A contract state? New public management in Australia. In New public service (pp. 177-197). Gabler Verlag, Wiesbaden.
McKendrick, E., and Liu, Q. (2015). Contract Law: Australian Edition. Macmillan International Higher Education.
Middleton, T. (2003). The difficulties of applying civil evidence and procedure rules in ASIC’s civil penalty proceedings under the Corporations Act. Company and Securities Law Journal, 21, 507-529.
Oliver, P. (2013). Incorporated legal practices: ILPs by the rules: Statutory and regulatory obligations for incorporated legal practices and legal practitioner directors. Proctor, The, 33(6), 46.
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