A company’s object clause states the range of activities and the purpose for which it is founded. As provided in the company statutory legislations, an object clause dictates the capacity of a company to act. These clauses determine the extent of the powers which the company can exercise in order to achieve the objects. Thus stating the object of a company in the company’s constitution is not a mere legal technicality but rather a necessity of great practical importance. As a result, any contract entered into beyond the company powers set in the object clause would be deemed void ab initio.
Relating this to the case in question, Ted included an ‘objects clause’ in the constitution of OW which restricted the activities of the corporation to the organic framing of grapes, the production of organic wines and any related and incidental activities. When Priya opted to get into a contract with Seedy Vineyards for the supply of chemically engineered grapes, she was placing the company in a position of ultra vires action. The company was acting ultra vires as it was in contravention of the object clause of the company policy. A company has no power to act on anything which is beyond the purview of the objects clause. In fact, this rule is put in place to ensure that the rights and interests of the shareholders are protected from the risk of being subject to unauthorized businesses.
Additionally, Priya was acting ultra vires with regard to her role in the company. She could only get into agreements worth $100,000 or less without the scrutiny of the board. Making a contractual agreement worth $500,000 was procedural ultra vires on her part. She was acting beyond her power and authority and could not undertake such a transaction on behalf of the company. Furthermore, the acts by Priya took place out of her contractual timeframe. There was a fixed contract between her and the company which ran between February 2016 and February 2018. In fixed contracts, no notice need to be given after the contract duration comes to an end and the contract is terminated by default. The employee ceases to be a member of the company and can no longer represent the company in its dealings. Therefore, the legal position is that the agreement between Priya and Seedy Vineyards was unenforceable as such an act was null and void in the face of it.
Likely Defense by Seedy Vineyards
The contract may be prima facie void and the members of Seedy Vineyards might have just been protected by the object clause. However, the fact that Priya exceeded her authority by entering into such agreements might not offload the company from being obligated to perform its duty in the contract. Additionally, it may be immaterial that the agreement is in breach of the objects clause in OW’s constitution. The enforceability of the contract could solely be up to Seedy Vineyards since the contract was founded on mistake which is the misapprehension of a fact or factual situation. Ordinarily, parties are not expected to know the arrangements within a company and thus acts of procedural ultra vires can bind the companies to the contract. There was an erroneous assumption on the part of Seedy Vineyards with regard to identity. The presumption here is that when getting into the contract, Priya was acting on behalf of the company, as an agent of OW. A mistake as to the identity of one of the parties to the contract is termed as a unilateral mistake. The effect of mistakes in a contract is that they make such a contract voidable on the part of the mistaken party. In this case, Seedy Vineyards might just have the option of either repudiating the contract or keeping up with it.
However, as it was held in the case of Ashbury Railway carriage and Iron Co, v. Riche, a contract founded on ultra vires motives cannot be ratified by shareholders and is void. In the case, the company was incorporated with the object of making, and lending upon hire, railway carriages and wagons plus carrying on the task on the business of general contractors and mechanical engineers. The company directors contracted a company of railway contractors called Riche to finance the construction of a rail in Belgium. However, the company later repudiated the contract stating that it was being ultra vires. Riche instituted a suit on grounds of contractual breach and it was ruled that the fact that the contract was ultra vires to the object clause meant the contract was void. Finally, the company can also bring an action against Priya for breach of duty for the failure to observe the limits of her constitutional powers.
Ted can enforce the clause in the constitution appointing him as company solicitor. When he included clause appointing himself as the company’s solicitor and stating that he could only be dismissed for misconduct, the inclusion amounted to an association clause. The clause was enforceable and it enumerated the relationship between Ted and the company so that any act which was beyond the clause would be ultra vires. In essence, any contact by the company that would contravene this clause would be considered null and void ab initio. Therefore, when Priya notified Ted that his services are no longer required by OW, she was acting ultra vires. The company could not terminate its contract with Ted but only for the stated reason which was misconduct.
The available remedy in his case would be compensation for the loss in wages from the date of termination to the end of his contract with OW. Thus the court will calculate his damages by taking his wages or salary and multiplying it by the number of months or weeks he was to be paid before his contract with the company would naturally come to an end.
In private companies, directors are always accorded the discretion to refuse to register a transfer of shares. Courts will often uphold this discretion except there is sufficient proof of mal fide on the part of the directors. In essence, courts will not impugn the decision to refuse registration simply because directors disliked the transferor or transferee especially because personal relationships are significant in small Companies. The personal views of directors are only scrutinized if they stand in the way of what is in the best interests of the company. This was the decision in Re Smith and Fawcett Ltd. where it was held that a director has a wide discretion to refuse to register the transmission of shares with the only limitation being that he must have acted in good faith.
Section 181 of the Corporations Act 2001 (Cth), is critical of directors acting in advancement of selfish interests. The provision requires directors to exercise their powers and obligations in good faith in the best interests of the corporation and for a proper purpose. In the foregoing case, an assessment of the conduct of Karim and Miles proves that they are in breach of this provision.
Karim can be seen as intimidating Olive by tabling an offer 10% less than the price Priya was paying for the shares. Karim and Miles wanted to retain control of their shareholding but were constrained by a lack of funds. With this regard, his decision to stall the registration of the share purchase by Priya was aimed at achieving selfish ambitions. He was placing selfish interest before anything else. As a result, he had refused to register the transfer in a bid to sway Olive into selling him the shares. Yet the company would have greatly benefited from a sale of shares that was 10% up as this would mean the company is valued highly compared to a valuation coming from the offer tabled by Karim. Therefore, Karim and Miles conduct in the foregoing case were not merely motivated by dislike, but were evidently in the way of the best interest of the company. The directors were not acting in good faith by refusing the registration and thus were in contravention of Section 181.
Furthermore, section 181 provides that penalty can be imposed for failure to uphold the principle of good faith while handling company’s transactions. Section 184 imposes criminal liability to any director who acts dishonestly in company transaction to facilitate personal gain. Section 198G of the Act provides that an officer of a company –in this case the managers- who acts ultra vires as the duo did, will be provided with a penalty of 25 units. With respect to available remedies, both common law and equitable remedies are available for Olive. Common law remedies in the case include compensation and rescission. The two will be personally liable for compensation of the monetary worth of the 10% shares less the original value. An equitable remedy can be found in specific performance. Olive can successfully seek a court order by lodging an application requiring Karim and Miles to register the transfer of shares to Priya. In Re Hafner, Olhausen v Powderly, the Court ordered the directors of the company in question to register a transfer of shares, where their discretion had been exercised to prevent the beneficiary of the shares challenging their actions of paying themselves generous remuneration.
There is an actionable cause of action in breach of director’s duties on the part of Miles after the failure to inform her of the improved prospects of the company. In her capacity as a director, she owed Olive a number of duties as a shareholder to the company which have been breached in the case.
Directors have a duty of loyalty to the shareholders of a corporation. The duty of loyalty is founded on the fact that a director cannot personally profit at the expense of the company. Thus it is the duty of the director to ensure that the shareholders are well informed of the performance of the company in relation financial income, profit margins and prospect performance. As already evident in the case, the decision by Olive to sell the 10% shares owned in Seedy Vineyards was informed by the failure to pay regular dividends. It was not only a reasonable act but also a contractual duty on the part of the directors to inform Olive of the improved prospects of the company.
Another duty that directors have is to avoid conflicts of interest. Directors have a fiduciary duty to ensure that they act in the best interest of the shareholders and not their own. The fact that Miles opted to keep silent about the improved prospects of the company was because she was interested in raising her stake in the company by purchasing from Olive. She was motivated by selfish interest. Ideally, she ought to be working in the best interest of the shareholder, working hard to ensure that the company was registering good returns so as to boost profit margins. However, she was not acting in the interest of the shareholder –Olive- but her own.
Directors also have a statutory obligation to not use their powers for an improper purpose. Section 182 of the Corporations Act 2001 provides directors with an obligation to not misuse their position to gain advantage. As already proven, Miler misused her position to gain advantage by first not revealing the improved prospects and secondly, refusing to register the transfer of shares to Priya so as to purchase the shares on her own.
With respect to the breach of the aforementioned directors’ duties, Olive can successfully institute a course of action against Miles.
References
Ashbury Railway carriage and Iron Co, v. Riche LR 7 HL 653
August Jackson. Does a corporation owe fiduciary duty to shareholders? (Online). 2017, November 21. <https://smallbusiness.chron.com/corporation-owe-fiduciary-duty-shareholders-70243.html>
Australian Law Reform Commission. The objects of the Act. (Online). 2010, August 16.<https://www.alrc.gov.au/publications/>
Chris Turner. Unlocking Contract Law. (Routledge, 4th ed, 2014).
Corporations Act 2001 (Cth)
Cram. Share transfer. (Online). 2014, September 01. < https://www.cram.com/flashcards/share-transfer-5051025>
Paul Davies and Sarah Worthington. Principles of modern company law. (London: Sweet & Maxwell, 10th ed, 2003)
“Find answers to common questions about the Australian Stock Exchange.” (2010, December 05). Retrieved from https://www.asx.com.au/about/shares-faqs.htm#6942
LawTeacher. Most important feature of a company. (Online). November 2013. <https://www.lawteacher.net/free-law-essays/business-law/most-important-feature-of-a-company-business-law-essay.php?vref=1>
John Charlesowrth. Charlesworth company law. (Sweet & Maxwell, 17th ed, 2005).
Practical Law Australia Team. Practical law australia company law transfer of shares practice note. (Online). 2016, August 11. <https://insight.thomsonreuters.com.au/resources/resource/transfer-of-shares>
Re Hafner, Olhausen v Powderly [1943] I.R. 426
Re Smith and Fawcett Ltd. [1942] Ch 304
Sarah Worthington. Sealy & worthington’s cases and materials in company law. (Oxford University Press, 11th ed, 2013)
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