Legal Framework Of Business Associations In Australia

Case 1: Avocado Smash Pty Ltd

1.Miles and Patricia have owned and operated and organic avocado farm on the Sunshine Coast for many years. In 2014 they decided that they wanted to step back from the business and allow their children to get more involved and takeover. As such, they incorporated the company Avocado Smash Pty Ltd (“AS”) and transferred the farm to the company. They then asked their solicitor, Coral, to draft the company constitution. Because of their desire for the company to continue their practice of organic farming, Miles and Patricia asked Coral to include an ‘objects clause’ in the constitution which restricted the activities of the corporation to the organic farming of avocadoes and any related and incidental activities. When drafting the constitution Coral included this clause, along with a clause appointing herself as the company’s solicitor and stating that she could only be dismissed for misconduct. Coral received an allotment of 6% of the shares in the corporation as consideration for drafting the constitution.

When the company was incorporated in late 2014, the board was made up of Miles and Patricia, along with their daughter Alicia (who is also the company’s Chief Financial Officer) and their son Leighton. On the 1st of January 2015, Leighton was appointed Managing Director of AS for a period of three years. The board did not formally reappoint Leighton as Managing Director after the 1st of January 2018, but he continued to act in that position. In March 2018, Leighton arranged for the 2 appointment of Nuala, a recently admitted solicitor and his current girlfriend, as company secretary of AS.

One of the terms of Leighton’s appointment, which were set out in a contract between him and AS, included a restriction to the effect that he was not to commit the company to any transactions in excess of $50,000 without approval by the Board of Directors. Leighton had been looking at ways of expanding the business, and, at the suggestion of Nuala, began investigating turning some of AS’s unused land into the ‘Sunshine Coast Avocado Tourist and Caravan Park’. In July 2018, Leighton began negotiations with Build Em Architects Pty Ltd for plans for tourist and caravan park. On the 1st of August, Leighton signed a contract with Build Em Architects, as managing director along with Nuala as company secretary. The contract was for $150,000 worth of plans to be paid in three instalments. On the 10th of August, Leighton notified Coral that her services were no longer required by AS, as they now had sufficient legal expertise with the appointment of Nuala.

Case 2: Great Games Ltd and Great Adventures Ltd

When Alicia received the invoice for the first instalment from Build Em Architects, she raised the contract with Miles and Patricia who were surprised. They called Coral for advice, but she said that she has been dismissed from her role and is about to bring an action against the company for breach of contract.

Advise Miles and Patricia:

A. Whether AS is bound by the contract with Build Em Architects given they believe that:
a. Leighton has exceeded his authority to enter into such agreements; and
b. The agreement is in breach of the objects clause in AS’s constitution;
B. Whether Coral can enforce the clause in the constitution appointing her as company solicitor and what type of remedy would be applicable.

2.Great Games Ltd is a company that manufactures and sells large and exciting outdoor play equipment for adults. The directors of Great Games are Zak, Taylor and Abdullah. Great Games also owns 60% of the shares in Great Adventures Ltd a company that markets exciting adventure packages. Zak, Taylor and Abdullah also sit on the board of Great Adventures, along with two independent non-executive directors (Bethany and Chris). Whilst the two companies are independent from each other, they share a brand image and often advertise their products together as they aim at the same target market.

Whilst Great Adventures is performing well, Great Games is in financial difficulties with outstanding payments on a number of loans with BankEast. At a board meeting of Great Adventures on the 20th of July 2018, the board resolves to provide a loan to Great Games in order for them to make repayments to BankEast. The minutes of the meeting note that the reason for the provision of the loan to Great Games is that: it is in the best interests of Great Adventures for Great Games to continue as a viable entity and any failu

The resolution was passed but both Bethany and Chris voted against it on the basis that they thought that the risk of adverse reputational consequences was minimal. Bethany thought that the real reason for the loan between the companies was that Zak, Taylor and Abdullah were concerned about their reputations as directors of Great Games if the company went under.

Advise Bethany and Chris as to whether Zak, Taylor and Abdullah have breached s181 of the Corporations Act 2001 (Cth), or their equivalent equitable duties to Great Adventures Ltd (including any remedies or penalties that might be applicable).

Case 1: Avocado Smash Pty Ltd

The Corporations Act 2001 (Cth) provides for the legal frame work of business structures in Australia. Notably, the business structure is set under different regulations and therefore, it is crucial to consider the legal regulations that guide the operations of the projected business form. Certainly, business associations are membership groups with the objective of enhancing and facilitating the interests of the members. The projects facilitated by business associations require resources that individual corporations cannot manage, for instance, the project may need more time before yields or require heavy investment of funds. Moreover, business associations need lobbying of information, research and ensuring the standard of the business association before embarking on the project. There are legal regulations that guide the members of a business association and all the members are bound by the regulations. The assimilation of corporation act 2006 revised article of association and memorandum of association guide the members in the management of the business association and the achievement of the projected objective(s). The report seeks to offer analysis and suggestions to cases related to business associations.

1.According to corporation act 2006, the assimilation of model article of association is prime since it provides limelight regarding the operations of a corporation. The model describes the activities of the corporation and therefore specifies the scope of its undertakings. The shareholders have the liberty to take the activities as the members wish to be assimilated into the corporations’ day to day activities.However, it may not go in contradiction of the law of land and the provisions of the Corporations Act. Companies that were formed before the amendment of the corporation act 2006 were guided by the objective clause and could not act beyond or outside its objects clause and any action done beyond the object clause will be ultra vires and invalid. Such actions could not be approved even by the approval of the whole body of members. The Corporations were, however, obligated to do anything which is related to and significant upon the objects indicated, and such act is not to be reflected as ultra vires.

According to the guidelines of the object clause (1985), the shareholders were expected to cautiously draft before the implementation since violation of the clause would be void unless otherwise indicated. The drafting should include the key matters of the corporation.The matters which are related or subsidiary to the accomplishment of the key objects are further assimilated in the first section of the object clause. The objects assimilated in the first section of the clause include the directors of the corporation, the operations of the company and the accountabilities of the directors according to the nature of duties.The objects of the corporation must not be unlawful, dishonest or contrasting to public policy or in violating of the Corporations Act, 2001.The objects clause must be sensibly drafted but the clause should be in a clear and definite. The clause empowers the members and the creditors to know the determination for which the reserves of the corporation are allocated.

Case 2: Great Games Ltd and Great Adventures Ltd

The adjustment of the clause has extensive implications and thus Corporations Act has retained some limitations on the right of a corporation to adjust the objects clause. A corporation may, by passing a special resolve and getting it confirmed by the Company Law Board to adjust its objects clause if the adjustment is essential to facilitate the company.Some of the exemptions that may need the corporation to adjust the objects clause include conducting its transactions in an improved way and more effectively, accomplishing its key drive by new or improved means, enlarging or changing the local area of its action, conducting on business which under the existing condition may be suitably or favorably combined with the business of the company, selling or disposing of the whole, or any part of the activity of the corporation, constraining or abandoning any of the objects specified in the memorandum and joining with other corporation or members.

The powers of a corporation are limited by ultra vires, therefore, if the undertakings provided for exceed the objects clause is ultra vires the corporation and thus negated. The corporation shall not be certain by such acts which are ultra vires the corporation. The resolution of the doctrine of ultra vires is to guard the interests of members of the corporation. Consequently, by feature of the objects clause, the members of the company recognize the purposes for which the resources are allocated by the company.To protect the interests of the shareholders and the third parties who enter into deals with the company, the corporation's activities are limited to the objects given in the Memorandum of Association. The corporation cannot do anything beyond the objects clause and if so, the corporation is ultra vires and would be void.

However the world of business has changed over the years and object clause have often been regarded as unwieldy as many companies in the 21^st century attempt to include as much as possible in their operations. According to In re “Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006),” the court ruled that a company of obligated to perform any activity provided it’s in the best interest of shareholders. Therefore, in frequent occasions, companies included a wide “Catch all” clause that provided for the ability for any company to include all its objects.  Anew dawn came with the implementation of the companies’ act 2006 which abolished the requirement of new companies to have object clause. The activities of companies formed during this period were effectively limitless, unless restricted by the self-imposed articles and rule of law. The operations of the companies that were formed before the corporation act 2006 became more complicated in their operations. Instead of doing away with the clause they include it in the article of association and the objective clause became potentially blighted.  It has become clear that the corporation act 2006, many companies that felt restricted by the old act have soon amended the new act to replace their article e of association. The object clause therefore no longer reflects the current activities of the company, therefore termed as unnecessary hindrance.

Object Clause and Ultra Vires under Corporation Act 2006

Certainly, in review to the corporation act 2006, the case study between AS and Build Em Architects assimilates non-violation of the objects clause and thus AS is bound by the contract. The assimilation of the corporation act 2006 is clear and definite that a corporation can act beyond or outside its objects clause provided the actions are legal and are accepted by the company. A company will act provided such actions are approved by the approval of the whole body of members. However, in older days, the objects clause integrates some exemptions, adjustments that need the approval of the shareholders. The adjustments include conducting its transactions in an improved way and more effectively, accomplishing its key drive by new or improved means, enlarging or changing the local area of its action, conducting on business which under the existing condition may be suitably or favorably combined with the business of the company, selling or disposing of the whole, or any part of the activity of the corporation, constraining or abandoning any of the objects specified in the memorandum and joining with other corporation or members. However, the modern corporations are limitless in terms of nthier action. The company can engage in any lawful activities provided it is not stated otherwise in the article of association. Therefore AS company was in a right position to enter into the contract and act. However, for a company to enter into a contract, there should be a signatory from one of all or one of the directors or any other person appointed to take bind the company. Therefore, AS company is not bound in that contract as there was no consent of one or two company directors of any other person appointed by the directors to do so

The move by the manager to enter into the contract by the Em architects is a legally accepted move as per the guidelines of the 2006 corporation act. However, the contract breach comes in place when Miles and Patricia who are the directors of the company are not consulted in the signing of the contract. Initially, a company would use a common seal while entering the contract, the seal was made to represent the general view and decision of the company. However, the seal was abolished and power of the company representation given to directors. Therefore, the manger, being of legal age and employee of the company could source of contracts and deal for the company, but needed directors signatories to enter the contract. Therefore, there was a breach of company policies in entering the contract, making AS not bound by the contract. 

Guidelines for Object Clause

2.Legal regulations mandate the directors of companies to exercise power within the confines and due carefulness. The Corporations Act 2001, s180 require corporate directors to practice authority and perform duties with necessary care carefulness. The responsibility is subjected to business judgment rule will need the director to act in good faith and not to use the judgment for his personal gain. The directors should ensure there are well informed about the subject matter to decide with corporate interest. In reference to the case, “Stone v. Ritter, 911 A.2d 362, 370 Del. 2006 (2006),” the court declared that, a director or any other member of the companies’ managerial board should act in the interest of the whole company.  Also, the other shareholders and the officers of the firm must undertake their obliged duties in good faith for the benefit of the corporation (s 181). Additionally, managers are also restricted from improper use of managerial position and power mandated to them to their personal advantage (s 182).

 Honesty is a vital tool that a manager should possess to act in good faith for the goal of maximizing the shareholder's wealth.   If the manager uses the mandated powers to perform duties for his personal interest, he will have acted for the wrong purpose and therefore not acting in good faith for the welfare of the firm. Responsibilities concerning the equity will require an individual with the full fiduciary capacity to be a trustee for the benefactors. Most duties are obliged to the directors because the relationship between them and the company is fiduciary.   

The breach of duty is not always subjective even if the responsibilities mandated to the directors focus on honesty and sincere beliefs. The reason is that the honest director can also fail to fulfill the mandated obligation even if he was acting in the company’s best interest. However, if the director believes that his deeds were for the firm’s interest, the law court will not assess the values but instead look at objective and independent evidence that the director believes so.

As the directors of Great Games Ltd Company, Taylor and Abdullah are liable for the breach of Company Act 2001, s180. The Act indicates that the judgment rule to be conducted by the directors requires him to act in good faith, do the right purpose and to avoid personal interest from the subject matter.   

The act also requires the directors to have a clear definition of the subject matter in such a manner that they will act for the welfare of the company.  Additionally, regarding s181 the company officials together with the directors are responsible for undertaking duties in good faith for the wellbeing of the firm and proper purpose. According to the section, the director is expected to act in good faith to benefit the shareholders and also to fulfill the objective of the company. Intimately, the duty is connected and directly related to the responsibility of acting for the proper purpose.  The court is required to determine whether Taylor and Abdullah have breached or have performed in the best way to benefit the company. They will be required to use both objective and subjective tests to come up with a sound conclusion. Taylor and Abdullah genuinely believe that the actions are in the best welfare and interest of the firm, the court, therefore, should not repudiate the declaration by only assessing the value of the act itself commercially. The court should take a look at the objective evidence that the Taylor and Abdullah truthfully embrace the belief.

The Australian Securities and Investment Commission (ASIC) is accountable for setting remedies for directors regarding the act. The commission does that to impose and also control the permission of Act. If the court makes an order regarding the 1317E of the same Act, the directors may face the consequences inform of a monetary penalty. The director, therefore, is required to pay the amount to the ASIC on behalf of the commonwealth. The overall penalty required is $200,000 according to the Act. The court may also rule to discontinue the director or order for compensation. Consequently, Taylor and Abdullah are subject to the remedies provided above for the breach of Act 2001.

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