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LEGL2002 Law of Business Organisations

Question

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Questions:

Cool Surf Stuff Manufacturers Pty Ltd (CSSM Pty Ltd) is the brainchild of Ann, Blake, Cathy and Daron who are talented entrepreneurs and sportspeople. When they register the new company with ASIC, they list themselves as the only directors and only shareholders. As the initial shareholders, they each receive one ordinary share, with each share entitling the holder to one vote in a general meeting of members.
The company has a constitution but it only includes the following two articles:
Article 1 - Subject to any rules and procedures set out in this constitution, the business of the company is to be managed by or under the direction of the directors.

Article 2 - The company cannot enter into any contract that will require the company to pay more than $20,000 in any calendar year unless that transaction has been approved by ordinary resolution in a general meeting of members.

The constitution does not exclude the replaceable rules. The replaceable rules therefore apply to the company, with the exception of any replaceable rule that conflicts with an article in the company’s constitution.

At their first board meeting, the directors pass a resolution to appoint Daron as Chief Executive Officer (CEO) of the company, ‘effective immediately’. They decide that they will prepare a formal written employment contract for Daron at a later stage but in the meantime, they encourage him to start working as CEO. Daron asks whether the board would be happy for him to order business cards for them all and whether it would be okay if his own business card indicates that he is CEO. The others all agree to this.

Elon works in a precision machinery warehouse and is a good friend of Daron. Daron tells Elon about his new position at CSSM Pty Ltd and mentions that he feels like a very powerful businessman even when he is not allowed to enter into any contracts over $20,000 on the company’s behalf. Elon tells Daron that he is now responsible for selling the new line of surfboard shaping machines and it would be an excellent acquisition for CSSM. Elon shows Daron the ultimate Surfboard Shaping Machine and performs a number of high precision and streamline cuts with the latest design software installed on its computer. Daron agrees that the shaping machine would be an excellent investment for the new company, and the price of $35,000 is a once-in-a-lifetime opportunity. He provides Elon with a copy of his newly printed business card indicating that he is the CEO of CSSM Pty Ltd and Elon drafts a contract for the sale of the Surfboard Shaping Machine. Daron mentions that he will need to get approval at a general meeting of members of CSSM Pty Ltd.

Daron then goes home and sends Ann, Blake and Cathy an email telling them that a general meeting of members of CSSM Pty Ltd will take place at 8:00 AM on the following day at his home. His email explains that the purpose of the meeting will be to vote on whether the company should sign the contract for the Surfboard Shaping Machine. He attaches a copy of the contract to the email.

Daron then calls Ann, Blake and Cathy to tell them to check their emails and to ask whether they can attend the general meeting. Only Ann is able to attend. Blake and Cathy are not available at the proposed time and they both complain to Daron about the short notice and request that he re-schedule the meeting at a later time so that the proposed resolution can be properly considered and debated. Daron ignores their requests and the next day Daron and Ann meet at the scheduled time and place, and they both vote in favour of the resolution to sign the contract.
After Ann leaves, Daron drafts the minutes of the meeting, recording that the resolution has been passed. He has heard that two directors should sign company contracts, so he signs his own name and forges Ann’s signature. He indicates under the signatures that Ann and he are directors of CSSM Pty Ltd and that they are signing on behalf of the company.

Daron then visits Elon and gives him the signed contract. Elon expresses surprise that Daron was able to organise a shareholders’ meeting in such a short time period. Daron explains that there are only four shareholders in the company and that they are all very flexible, so it is quite easy to organise a meeting at short notice. Elon thinks Daron looks a bit guilty when he says this and he suspects Daron may not be telling the truth about the shareholders’ meeting. Nevertheless, Elon thinks to himself that, since the contract has been signed by two of the directors of CSSM Pty Ltd, he should have no problem in holding CSSM Pty Ltd to the contract.

At the next board meeting of directors of the company, Blake and Cathy express considerable disappointment that Daron went ahead with the contract for the acquisition of the Surfboard Shaping Machine without properly consulting with them. They tell Daron and Ann that they do not think that the meeting at Daron’s home was a valid general meeting of members. They propose a board resolution stating that CSSM Pty Ltd is not bound by the contract for the Surfboard Shaping Machine and that the company will not make any payments under the contract. Ann, who is disappointed that Daron forged her signature, votes with Blake and Cathy and the board resolution passes by three votes to one.

Daron then contacts Elon to let him know that CSSM Pty Ltd wants to cancel the contract. In the meantime, Elon turned down the possibility of selling the same Surfboard Shaping Machine to another corporate customer who offered $45,000. Elon was entirely convinced that he was bound by the contract with CSSM Pty Ltd. Elon tells Daron that CSSM Pty Ltd must honour the contract and threatens legal action to hold the CCSM to the contract.


1.Daron comes to see you for advice. Advise Daron regarding the likelihood that a court would require CSSM Pty Ltd to honour the contract with Elon.

HINTS:

In the process of working your way through answering this question, you should make sure you always state the source of the relevant legal rules (e.g. a section of legislation or a court case) and apply those legal rules to the facts. A possible structure for your assignment would be as follows:
-    First – consider whether there were any procedural irregularities in relation to the purported general meeting of members and, if so, whether this means the court would find that the resolution passed by Daron and Ann at that meeting was invalid.
-    Second – consider whether a court would require CSSM Pty Ltd to honour the contract with Elon on the basis of the common law rules.
-    Third – consider whether Elon would be able to rely on the statutory assumptions in order to persuade a court to require CSSM Pty Ltd to honour the contract.
In the course of writing your answer, you may find it useful to argue ‘in the alternative’. For example, if you argue that the court would likely find that the resolution passed by Daron and Ann at the purported general meeting was valid, then (in addition to exploring the legal implications of this) you may want to write something like:
While I have argued above that Daron and Ann’s resolution was valid, it is also worth considering the legal implications if the court determines that it was invalid. In that case …
Conversely, if you argue that a court would likely find the resolution invalid, then you might like to discuss the legal implications if the court instead finds that it was valid.

LEGL2002 Law of Business Organisations

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