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2106AFE Company Law

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  • Course Code: 2106AFE
  • University: Griffith University
  • Country: Australia

Questions:

Please answer the following questions using the Issues, Application of Law and Conclusion format. Explain your answer with references to relevant sections of the Corporations Act 2001 (Cth) and case law.

Q1.

Alan and Bill are the only shareholders and directors of Sailaway Pty Ltd (Sailaway) which distributes and sells yachting clothing and equipment. As well as a warehouse and attached shop, Sailaway owns a large block of waterfront land which it uses for storage. Alan is also the chairman and majority shareholder of Broadacres Pty Ltd (Broadacres) which buys rural land for subdivision into hobby farms. Broadacres needs to borrow $1.5 million to fund its latest purchase. It already has a large overdraft and has no unencumbered assets to use as security for another loan. Alan organised a loan of $1.5 million to Broadacres from ABC Finance Ltd (ABC Finance) on the basis that Sailaway would guarantee the loan by executing a mortgage over its waterfront land. Alan signed the mortgage documents as a director of Sailaway and forged Bill's signature as the other signatory. Tom, the local manager of ABC Finance, had been involved in earlier dealings with Sailaway and knew that its business did not include real estate and property development. However, Tom was away at the time the documents and the transactions were organised by a relieving manager, a close friend of Tom, who did not ask any questions about Sailaway's involvement.

Broadacres is now in financial difficulties and has defaulted on the loan from ABC Finance. ABC Finance is seeking to enforce its rights under the mortgage against Sailaway.

Advise Sailaway whether it is bound by the mortgage issued by ABC Finance.

Q2.

Conrad, Marcia and Roger seek advice from your firm, Prisy Financial Advisory Services. Conrad states that he does not want to be appointed a director or secretary. He suggests instead that his family company be appointed as a director; and the company should not have a company secretary;

Marcia is currently unavailable for meetings as she has five months still to serve for her last conviction for falsifying company accounts.

You have been asked to establish their new company (No-Tax Agents Pty Ltd). You advise them not to bother with their own constitution, but instead to rely on the replaceable rules in the Corporations Act.

  • Advise who should be appointed as directors of their company in view of the above information.

Assume that Conrad’s family company subsequently goes into liquidation. The liquidator, in her report to ASIC, states that the secured creditors have been repaid in full, but the unsecured creditors will not receive more than 20 cents in the dollar. The liquidator does not find any evidence of wrongdoing on the part of Conrad or any of his fellow directors.

However, the ASIC's records indicate that Conrad has, over the last nine months, had a similar track record with two other small, proprietary companies.

(b) What ramifications (if any) does the ASIC’s record have for Conrad?

 

Answers:

1.

Issue

The issue that has been identified in the given scenario is whether mortgage can be claimed by ABC Ltd for the land that is owned by Sailaway Pty Ltd which had been mortgaged for the purpose of getting a loan.

Law

The Corporations Act 2001 (Cth) can be referred to in this given scenario for addressing the relevant issues that have been identified in the given case study. Thus, the relevant sections of the Corporations Act 2001(Cth) which are applicable in this given scenario are enumerated below:

Section 127- This section of the aforementioned act states that an original document of a company will only be legally binding upon the company and its stakeholders and will be considered to be valid, if the same is signed by atleast two of the company directors. Such document may or may not contain the common sea of  the company.

Section 129- Subsection 5 of the aforementioned ct states that any document of the company which has been duly signed as per the provision as provided in section 127 of the act will be held to be legally valid.  In accordance with section 129(6) of the aforementioned act it can be stated that any document which contains the common seal of the company will be held to be legally valid and binding.   

Section 128- It can be said in accordance with this section that a person who deals with the company has the right to rely on the assumption of the provisions as provided in section 129 of the aforementioned act. However, according to subsection 128(4) of the Corporations act it can be stated that  an assumption cannot be made by any person according to the  provisions of section 129 if such person is suspected to know at the assumption is false at the time of dealing. The judgements given in the case Australia and New Zealand Banking Group Limited v Adventure Quest Paintball-Skirmish Pty Limited; Woollard v Hodgson; Hodgson v Wollard [2016] NSWSC 188 is the authority related to circumstances in which third parties can rely on the assumptions under section 129.

 


Subsection 3b of 129 of the Corporations Act 2001 states that a person can assume that any person who is acting as an officer or agent of the company has the authority to discharge their duties just as any other agent of another company.

In the notable case Royal British Bank v Turquand (1856) it had been held by the court that any person transacting business with a company will be entitled to believe that the company in consideration complies with the internal rules even if such company in reality does not do so. This provision has been termed as the internal management and the same is applicable in company case laws.

However an exception to this indoor management rule has been illustrated in the case USSC v Hospital Products International Pty Ltd. it was held by the court that dishonesty or failure on the part of a person who deals with a company to enquire about the discrepancy in the management with the fear to discover any fraud or breach likely to have been committed, will be held to have knowledge of such fraud or breach and therefore the indoor management rule will not be applicable in such cases. In another landmark case Bank of New Zealand Pty Ltd v Fiberi Pty Ltd, the directors failed to comply with the requirements of the constitution of the company. Such directors had produced a document by a fake company secretary for the purpose of obtaining a loan. However, it was held by the court that susc transaction was valid.

 


Application

In the given case study it has been provided that Allan and Bill are the directors of the company Sailaway Ltd. However, Allan is also the chairman of Broadacres and also holds the majority of the shares of Broad acres. Allan on behalf of Broad acres had been able to obtain a loan by putting the company Sailaway land on mortgage. It can be said with reference to the facts of the Allan had been able to procure a loan of 1.5 million dollars from the company ABC Finance Ltd. At the time of repaying the loan the company Broadacres went bankrupt and could not repay the loan. The company ABC Ltd wanted to exercise their right on the land that was initially mortgaged by Allan to obtain the loan.  

It can be stated in accordance with the provision of section 129(5) of the Corporations Act 2001 that any document which is duly signed by at least two of the directors of the company as provided in section 127(1) of the aforementioned act will be held to be legally valid and executed. Further in accordance with the decision of the case Royal British Bank v Turquand, that a third party is not required to make investigations about the internal management of the company. A third party is entitled to assume that the that the company in consideration complies with the internal rules of the company even if the company in consideration does not comply with rules of internal management in reality.

Further in relation to the decision of the case Bank of New Zealand Pty Ltd v Fiberi Pty Ltd. it can be stated that a document which is signed by a fake secretary will be considered to be executed and valid. Thus by analysing the sections of the Corporation Act 2001 (CTH) and the decisons of the aforementioned cases in light of the facts of the case study it can be said that the deal of mortgage between ABC Ltd. and the company Sailway is valid

However, further scrutinizing the facts of the case has shed light on the fact that Tom, the manager of ABC Ltd. had proper knowledge that the company Sailaway did not deal in transactions related to the estates. Section 128(4) of the Corporations Act which states that a person cannot assume any facts under the section of 129 if such person had been aware that such assumption is likely to be incorrect is applicable in this given scenario. Further as held in the case USSC v Hospital Products International Pty Ltd, a person who fails to enquire about any discrepancy that is likely to exist in the internal management of an organization due to the fear of disclosing and fraudulent activity cannot rely on the clause of internal management rule as provided in the case Royal British Bank v Turquand,

In this case Tom had due knowledge of the suspicious nature of the transactions. He had a duty to inform his friend, who was acting as the relieving manager about the aforementioned fact and thus the internal management rule will to be applicable in this case study.

 

Conclusion

Thus to conclude, it can be said that the company ABC Ltd do not have the right over the company Sailaway’s land.

2 a.

Issue

The issue that can be identified to be existing in the given case study is who should be appointed as the directors of the company No-Tax Agents Pty Ltd

Law

The Corporations Act 2001(Cth) governs the provisions related to the appointment of the directors of a company and the duties of such directors. In accordance with the section 201 B of the Corporations Act 2001, it can be stated that a director of a company has to be a natural person who has attended the age of eighteen years of the age. Further e must not be disqualified by any other provisions of the law which are related to the governance of companies.

Thus by interpreting section 206 B of CA, it can be stated that a person is automatically disqualified from becoming a director, if such person has been convicted in a criminal offense. Further sub-section 206B(1) (a) of the CA prohibits any person from becoming a director if such person has been found guilty of an offense which is related to the decision making of the company which has had negative impacts on the company.

Subsection 206B(2) (a) clearly states that a person shall remain disqualified from being appointed as a director for 5 years from the date of conviction.

However, subsection 206B (2)(b) clearly states that in case of a person who has a served a prison sentence of five years, such person shall remain not be appointed as the director for five years from the day he is released.

Subsection 206B (1) (a) (2) of the CA states that a person who has been found to be guilty of adversely affecting the financial status and standing of company cannot be appointed as a director.

Section 206B(1) (b) (2) prohibits the appointment of any person as director, if such person has received 3 months of imprisonment and exhibits dishonesty.     

 


Application

It has been provided through the facts of the case that Conrad wishes his home company to be appointed as the director of the company No-Tax Agents Pty Ltd. However,  the home company of Conrad cannot be appointed as the director of No-Tax Agents Pty Ltd as it has been clearly specified in the section 201 B of the CA that a director of a company must be a natural person.  And a company cannot be treated as a natural person, a company can be held to be an artificial person.

As provided through the facts of the case study Martha has been serving a prison sentence. She has to serve five more months of her remaining prison sentence. Thus she is automatically disqualified from becoming a director of the company No-Tax Agents Pty Ltd according to the provision of section 206 B (1) (b)(2) of the CA. This section states clearly that any person who has been charged of an offense which involves dishonesty and has served an imprisonment of a time period of minimum three months is disqualified from becoming a director of a company. However, Maria can become the director five years after her conviction period which is to be calculated from the date of conviction as provided in section 206B (2) (b).  Thus by assessing the facts of the case as per the provisions of the Corporations Act it can be said that the only person who in this case can become the director is Roger as Conrad does not wish to become the director, his own company cannot become a director and Marcia is barred from becoming the director  

Conclusion

Thus to conclude it can be said that only Roger can become the director of No-Tax Agents Pty Ltd.

2 b.

Issue

The issue that has been identified in the given scenario is whether ASIC can take action against Conrad for making three companies go in liquidation due to insolvency

Law

Section 206 F(1)  of the Corporation Act states that ASIC has the authority to disqualify a person from managing the affairs of a company for a time period of five years. However as provided in section 206 (F) (1)(a), it can be stated that ASIC must give a notice to the concerned person according to the provision as provided in section 206F (b) within a time period of seven years if it is established that such person has been the managing the operations of more than two companies and such person is responsible for the winding up of the companies. It can be stated that a liquidator’s report is essential to substantiate the claim of winding up of the company.

According to section 206F(b) it can be stated that ASIC must give a notice to the concerned person in a prescribed form asking such person to justify why such person should not be disqualified from managing the operations of the company. The ASIC must provide an opportunity to the concerned person to be heard. In accordance with section 260F (1)(c) if the ASIC is convinced that it is justifiable to disqualify the person as the director, it can disqualify the concerned person.

Application

Thus as per the facts of the case it can be stated that the family company of Conrad had gone into liquidation. Although the liquidator did not find any fault on his part to be held responsible for the company going into liquidation, the ASIC had records that two other companies which were managed by Conrad had also gone into liquidation in a time period of nine months. Thus in this given scenario section 206F of the Corporations Act 2001 is applicable. As provided in section 206F (1)(a), it can be stated that the ASIC has the power to disqualify a person from managing the affairs of a company by providing a notice in accordance with section 206F (1)(b) within a time period of seven years if the ASIC finds that such person had been acting as the director of two other companies and the companies had gone into liquidation within a time period of 12 months after the person ceased to be the director. The report of the liquidator must be filed in accordance with section 533(1) of Corporations Act  2001. In this case the liquidator had lodged the report of liquidation of the family company of Conrad. The ASIC thus in accordance with section 260F(1) (B) can give  notice to Conrad why he should not be disqualified. According to section 260F 1(c) the ASIC can disqualify Conrad, If it finds that it is justifiable to do so.

 

Conclusion

Thus to conclude it can be said that the ASIC can disqualify Conrad from acting as the director a company

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