Legal Issues In Company Law

Changes in the constitution of a company

Introduction: Changes in the constitution; ability of the minor to keep a check on the changes and contractual powers of the company

Kody and Ryder completed their graduation from USC. They want to carry on business of exceptional handmade gifts and craft which they can sell online with the name Incredible Gifts Pty Ltd.

Now, there are series of transactions that took place which has resulted in raising two prime issues.

To make Salman aware of the procedure that is adopted by any company to bring changes to its constitution and can Salman has the power to prevent the company to incorporate a clause in the constitution that allow the directors to expropriate the shares of Salman.

In Australia, there is no one single form in which a business can be initiated. The numerous manners in which any interested party can carry on the business of his or her choice such as a sole trader or as a partnership firm or as a company.

No comoany in Australia comes into existence of its own. There is a set procedure which is laid down by Australian Securities and Investment Commission (ASIC) and the Corportaion Act 2001 which must be comply with to bring any comoany into existnece. As per section 124 of the Act, any comoany upon its incorporation is consideed to be a separte legal entiuty in law. In Salomon v A Salomon and Co Ltd and Lee v Lee’s Air Farming, the court held that when a company is registered then it is an artificial person and has its own inherent powers to act like a normal person, that is, to make contract, to sue, to hold properties and is analyzed in Macaura v Northern Assurance Co Ltd, etc.

Now, since a company is an artificial person then the rules upon which a company runs can either be decided on its own in the form of constitution or it can run through the provisions mentioned under the 2001 Act as replaceable rules or by both.

Now, while the comoany is carrying on its objectives, there are times, when the comoany feels the need to bring changes in the constitution. The shareholdesr are granted power under section 136 of the Act according to which changes can be bought in the constitution (it can be modified, repealed, etc) provided a special resolution is passed by the shareholders in a specail meeting with 75% of the shareholders vote moving in favor of the alteration. The alteration bound all major and minor shareholders of the comoany irrespective of the fact in whose favor the vote has been cassted.

Contractual powers of the company

At this point, it is important to note that,

Salman holds 10% shares in the comoany and the rest of the shares are hold by ryder and Kody. Ryder and Kody wants to bring changes in the constitution and thus by availing their power under section 136 of the Act, they have aclled a shareholdesr meeting wherein they pass the resolution with a majoirty of 75% even thirugh Salman has voted agiant the resolution with 10% votes. The resolution was passed to remove Salman from his solicitors post.

So, the alteration is valid and Salmna has to leave post. But, what if Salman wanst to challenge the lateration. Does Salman have the power to prevent the company to incorporate a clause in the constitution that allow the directors to expropriate the shares of Salman.

The basic rule is that any resolution passed by majority is binding on the shareholders of the common y irrespective of the fact whether they like the amendment or not and is held in Associated World Investments Pty Ltd v Aristocrat Leisure Ltd. But, as per section 246B if the alteration to the constitution is bought in so that variations or cancellation are bought in the class rights of the shares or to bring changes to certain specific rules of the constitution which is not allowed or when the alteration allows the expropriate shares of the minority shareholders then in such cases alterations are not allowed at all. The High Court in Gambotto v WCP Ltd submitted that if the important rights or expropriate shares of the minority shareholders are permitted by bringing changes in the constitution, then, the same is not permitted and is also held in Shears v Phosphate Co-op Co of Aust Ltd and Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd.

The expropriate shares of the minority shareholders is permitted only when it is just for the company or when it is for necessary purpose or when competition is created by the minority or detrimental is caused if minority remains as part of the company, etc.

At this point it is submitted that,

Salman was acting as a solicitor of the company of Ryder and Kody. But, with letting them know, Salam also get himself involved with their competitors, Incredible Gifts Pty Ltd, as he accepted the position of the accountant. Also, Melanie (with whom the company of Kody and Ryder are dealing) was continuously persuaded by Salman that she should sell his items to the competitor and not to the business of Kody and Ryder. So, Ryder and Kody were right by using their power under section 246B of the Act as the acts of Salman are not in the interest of the company and he is competing with the company.

Violation of duties of directors

Now, the next important issue that arises is:

Can Melanie sue the company of Kody and Ryder for the payment of her contract?

As per the facts, it was found that Kody and Ryder want to register their company with the name Incredible Gifts Pty Ltd. but, on the day of registration (2^nd May 2018), the name intended by them was already registered, thus, both Kody and Ryder decided to get their company name registered as Astounding Gifts Pty Ltd.

But, before the registration of the name Astounding Gifts Pty Ltd, Ryder on 26^th April 2018 establish a contract with Melaine wherein Melaine will supply his craft to Incredible Gifts Pty Ltd (which Ryder and Kody wants to register) at a payment of $5,000 per month.

Now, as already analyzed in Salomon v A Salomon and Co Ltd, that upon incorporation, a comoany gets the status of an artificial legal person who has the capacity to make contracts with the outsiders on its own behalf.

But, what is the satus of the contarcts that are made before incorporation?

The contracts made before incorporation are pre-registration contracts and as per Kener v Baxte, such contarcts have no validty in law and are void. The concept os reteriated in Black v Smallwood

But, section 131 of 2001 Act has given recoignitition to these contarcts and it was held in Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Limited, that if such contarcts are ratfied by the comaony (upon incorpration) itslef then such contarcts are enforceable. But, section 131 is applicable to those contracts which are made amid the utsider and the representaive of the comoany before ist incorporation ansd is held in Commonwealth Bank of Australia vs. Australian Solar Information Pty Ltd. A contarct with alredy registered comoany when later changes its name does npot make such contarct a pre refistration contract with the same comoany with new name. If ratified, the contarct gets the legal srtatus and if the comaony does not compy with such contarct then its is braech and is held in Airloom Holdings Pty Ltd v Thales Australia Ltd.

At this point it submitted, that a contarct with Ryder and Melaine on 26^th Aporil 2018 is apre registration contarct on behld of Incredible Gifts Pty Ltd. This contract can have legal effect only if Incredible Gifts Pty Ltd rectify the contract after its incorporation.

But, Incredible Gifts Pty Ltd was never registered by Kody and Ryder but they register the company as Astounding Gifts Pty Ltd. this new company has rectified the contract with Melaine on 12^th May 2018. It is submitted that the contract with Melaine was a pre registration contract as there was no company that was in existence when the contract was made. The company was made by Kody and Ryder which gave approval to the contract of Melaine and thus as per section 131, enforceability is granted to such contract.

Thus, the contract is enforceable and if Astounding Gifts Pty Ltd does not abide with its contractual obligations then Melaine can sue Astounding Gifts Pty Ltd for breach.

Introduction: Non compliance of the duties of the directors.

A company is established, Chip-Eze Pty Ltd. the directors of the company are Michaela, Jordon and Marianne. All of them are holding 25% share each. Ayub, Saeed, Donte, Neeve and Faizah together hold the remaining 25% shares. The business of manufacturing of potato chips was profitable but the business of frozen potato chips was at loss. The company was not able to pay its suppliers and creditors.

The directors called a meeting on 1^st August 2018 and they decided and passed a resolution in favor that a new company should be registered (Freeze Me Pty Ltd) and the profitable business must be sold to the new company. Complying with the resolution, Freeze Me Pty Ltd is registered on 10^th August 2018 and the profitable business was sold to the new company. now, the creditors dues were not paid and considering the situation of Chip-Eze Pty Ltd, the court appointed Archibald as the liquidator of the company.

Now, based on the series of transactions that took place has resulted in raising two prime issues

Archibald must be advice whether the directors are in violation of section 181 of the Act or any other related duties. If yes, then what consequences can be faced by them?

In Salomon v A Salomon and Co Ltd (1897) the court held that when a company is registered then it is an artificial person and has its own powers to act like a normal person, that is, to make contract, to sue, to hold properties, etc. In Lee v Lee’s Air Farming Ltd, the directors and officers aee considered to be distinct from the comoany and the acts that are carried out by them are in the companys name only.

Since a comoany is an artificial person, thus, it requires officesr to act on the behalf of the comoany. A comoany director is appointed under section 9 of the Act and includes director and shadow directors. the directors are authorsed to act for the comoany undet section 18A of the Act.

But, every directors is also imposed with duties.

One of the most promising duty that is imposed on the directors is the duty of good faith under section 181 of the Act.

Section 181 of the Act – every officer and director of the comoany is imposed with a duty of good faith and they must make sure that the acts that are carried out by them should be with proper purpose and in the comoanys best interest and is held in Re Smith & Fawcett Ltd. The court determines the compliance of the duty objectively, that is, not what the director thinks himself rather what the court thinks in the given situation. If the court thinks that the duty of good faith is violated then section 181 is breached and is held in The Bell Group Ltd v Westpac Banking Corporation (no 9). In ASIC v Adler it was held that the court will analyze the compliance of section 181 of the Act by comparing the acts of the directions with what a normal prudent man will do in the similar situation. (Ford, Austin and Ramsay 2000)

In Westpac Banking Corp v Bell Group Ltd (No 3) it was held that when the interest of the company is neglected by the director in presence of their own then section 181 of the Act is breached.

Section 191-195 of the Act also submits that whenever the directors indulge in any act those results in the prevailing the interest of the directors at the cost of the company interest, then, it is the duty of the directors that the company interest should prevail.

Also, when the directors are taking activities in order to avoid the payment to the creditors of the company then such acts are illegal phoenix activity and are breach of the duties of the directors and are held in Commissioner of Taxation v BHP Billiton Ltd [2011]

Now, the law is applied to the given facts and situation,

It is submitted that Chip-Eze Pty Ltd was carrying on two businesses, one at loss and one at profit, Chip-Eze Pty Ltd sold its business running at loss to Freeze Me Pty Ltd by passing a unanimous business. This transfer of business is nothing but the breach of section 181. The breach is incurred because Chip-Eze Pty Ltd was already facing financial problems and in order to deceive the creditors a new company was incorporated. This act is nothing but carried in bad faith and thus section 181 is violated.

Further, the acts of Chip-Eze Pty Ltd are in violation of section 191-195 as the directors of Chip-Eze Pty Ltd have given preference to their own interest and not to the interest of the company.

Now,

The directors are also found to involved in illegal phoenix activity as they deliberately shut down their business in order to cheat the creditors and thus are liable as held in Commissioner of Taxation v BHP Billiton Ltd.

Since the directors of Chip-Eze Pty Ltd have violated section 181 and section 191-195 of the Act thus, they can be imposed with penalty of $200,000. They can also be disqualified from their post.

Further, Faizah approached Jordon on 6^th August and asked that if he could but some more shares Chip-Eze Pty Ltd. Jordon agreed.

Now, the next important issue that arise are:

Can Faizah sue Jordon for breach of duties as Jordon agree to sell the shares just before the company, Chip-Eze Pty Ltd, went into liquidation?

One of the prime duties that are imposed on the duties of the directors is that every director must act in such a manner so that they must act with all care and diligence and is enshrined under section 180 of the Act. The acts of the director must be such so that the proper purpose of the company and the best interest of the company must be attained and is held in Statewide Tobacco Services Ltd v Morley and AWA Ltd v Daniels.

But, the duty under section 180 (1) if violated by the director will make him liable. But, a director can protect him by taking the defense under section 180 (2). The director can prove that he as acting in good faith with expert knowledge and has all reasonable belief that the acts are in the best interest of the company, then, the director cannot be held to be acting no in good faith and in the best interest of the company and is held in Daniels v Anderson.

Section 182 an section 183 of the Act further submitted that no director must misuse their position and information and is held in R v Byrnes.

Also, every company directors owns a duty towards the shareholder of the company and is held in Coleman v Myers.

It is now submitted that Jordon was in breach of section 180 of the Act as Jordan sold the shares to Faizah knowing the fact the company will be getting into liquidation. Thus the acts of Jordan are not in care and diligence. Also, Jordan misused the information and the position thereby breaching section 182 and 183 of the Act. Also, Faizah being the shareholder of the company, it is the responsibility of the Jordan to deal with him adequaty7. By, not comply with care the duty of violated as held in Coleman v Myers

Reference List

Books/Articles/Journals

Bottomley, Stephen, The Constitutional Corporation: Rethinking Corporate Governance, Routledge, 23-Mar-2016.

Cassidy, Julie, Concise Corporations Law, Federation Press, 2006.

Gillies, Peter, Business Law, Federation Press, 2004.

Latimer, Paul , Australian Business Law 2012, CCH Australia Limited.

Case Laws

Aztech Science Pty Ltd v Atlanta Aerospace (Woy Woy) Pty Limited (2004).

ASIC v Adler [2002] NSWSC 171.

AWA Ltd v Daniels (1992).

Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199.

Associated World Investments Pty Ltd v Aristocrat Leisure Ltd (1998) 16 ACLC 455.