Validity Of Powers And Amendment By Members In Company Constitution: Essay.

Q1: Advise Max as to whether he is able to:

a)enforce the clause in the constitution making him the company solicitor, and what type of remedy he would need to seek if he could; and

b)prevent the inclusion of the clause allowing the directors to expropriate his shares, even though the other shareholders have passed a special resolution. 

Q2:  Advise Banjo as to whether the directors have breached their equitable and/or statutory duties to AB (including any remedies or penalties that might be applicable). 

Powers of a Company in Relation to Its Operation

Constitution of a company or its replaceable rules set out the guidelines which the directors and officers of the company have to follow towards carrying on their powers in relation to the company. The constitution also sets out the terms of relationship of the company with any third party as well as the relationship between the members of the company. In this question the validity of powers provided to the constitution of a company have been discussed. In addition how and when can the constitution of a company be amended by members have also been discussed in order to determine the issues identified in the question. The first issue which has been identified in this question is that whether Max has the right to enforce the clause which was present in the constitution of Chocolate Cleaning Products Pty Ltd (“CCP”). The second issue which has been identified in relation to the question is that whether the directors of CCP can successfully change the constitution in the light of its previous clauses. The issues would be determined after identification of relevant provisions related to constitution as provided by the Corporation Act 2001 and then applying such laws on the facts of the case.

Section 124 of the CA state that the powers of a company in relation to its operation can be restricted to the constitution. However a transaction cannot be declared as invalid because it is not within the scope of the constitution.

According to Section 136 of the CA the constitution of the company can be repealed on modified by the company. A special resolution is required to repeal or modify the constitution which means that the majority of two third of voting members is required. It may be provided by the constitution of the company that a special resolution required to amend the constitution will not have any effect unless an additional requirement which has been provided in the constitution with respect to such modification or repealing has been acted in accordance with. In addition if it is not provided otherwise by the constitution the additional requirement can be repealed or modified by the company as provided in the previous subsection only if there is compliance with the additional requirement.

Section 232 of the act deals with oppressive remedy with respect to the member of a company. It has been stated by section 232 of the CA that the court can make any order which it thinks to be appropriate in addition the provisions provided in section 233. An order in relation to Section 233 under section 232 can be made by the court if it is owned by the court at the directors of the company and carrying on the affairs of the company or up present or future omission or act with respect to the company or a present or future resolution of class of members all members of the company which is not in the best interest of the members of the company or a member of a company or is unfairly discriminatory the judicial and operative to a member or members whether in any other capacity or that capacity.

Repealing or Modification of Constitution

In the case of Hickman v Kent or Romney March Sheep-Breeders Association it had been provided by the court that a statutory contact is formed between the members, officer and directors of the company through its constitution and such rules can be enforced against the members of the company. In the case of Forbes v NSW Trotting Club Ltdit had been ruled by the court that the rules of the constitution can be enforced by its member.

Section 140 of the CA states that a contractual relationship exists between the members of the company the constitution of the company

In the case of Gambotto v WCP Ltdit had been provided by the court that where the change in the constitution is related to expropriation the shareholders in majority would have to establish that the act was fair in all situation and was towards a proper purpose.

In his case it has been expressly provided by the constitution of dash that Max can only be removed from the position of as a solicitor of the company if he has been involved in an act of negligence. However it has been provided that the directors of the company have passed a special resolution in order to terminate the position of Max as the solicitor. In such situation according to the rues discussed above Max has the right to enforce the rules of constitution on the company. The same had been done in the case of Hickman v Kent or Romney March Sheep-Breeders Associationas discussed above. Max can also obtain an order under section 233 of the CA with respect to section 232 as the conduct of the majority shareholders is prima faice oppressive to the interest of Som. In addition there is a contractual relation between Max and the other members which if breached have legal consequences of contract law as per section 140 the CA

In relation to the second issue it is expressly provided in section 136 of the CA that the constitution can be changed only if a further condition for changing has been complied with and the same goes in relation to change the further condition. Here the further condition to remove Max as the solicitor is that Max commits negligence which has not been done in this case. Thus as per the provisions of S 136 the constitution cannot be modified in relation to the proportion.   In addition as per the case of Gambotto v WCP Ltd in relation to expropriation changes to constitution the directors have to prove proper purpose which would be difficult in this case.

Oppressive Remedy with Respect to the Member of a Company

Conclusion

According to the above discussion it can be stated evidently that Max can enforce the clause of the constitution on the company and the constitution cannot be modified even through a special resolution in this case as per section 136 (3).

The directors of the company are its supreme controllers of the operations of the company. Therefore the corporation law of Australia along with common law have imposed some duties and responsibilities on the directors to consider while managing the company. It has been made mandatory for the directors to abide by the duties or else they may be subjected to fines and suspension and can also personally liable. The issue which has been identified in the given scenario is that (1) have the directors violated their duty if good faith and proper purpose (2) have the directors misused there position and information and created conflict of interest

The CA is the primary legislation in Australia which deals with the duties of directors towards their organizations at both commonwealth and state and territories level. There are various equitable duties of directors as well while are consistent with the duties set out in the CA. in relation to this case the duties in relation to section 180(1), 181-183 and 588G of the CA has been discussed along with equitable duties. The section also discussed penalties under section 1317E, 206C and remedies as per section 232 and 233 of the CA. The defence provided in section 180(2) related to the common law business judgment rule has also been discussed to analyze whether the directors of Aussie Boats Ltd (“AB”) have violated their duties or not.

Section 180 (1) – Directors directed to apply proper diligence and Care while taking decision in relation to the company’s affair. Actions of directors under the section are determined objectively through lacing a reasonable director in similar position as the original director. If it can be established that reasonable director would take the decision the original direct is said to have complied with s 180(1).

Section 180(2)- if a reasonable director can take a decision taken by the original director the in relation to the risk associated with the business the decision can be exempted from the breach of duty as a business judgment

Section 181 – the directors direct to base their actions towards the purpose of the organization through Bona fide intentions.

Section 182- the directors directed not to use their position contrary to company’s interest and for personal gain.

Enforcement of Constitution Against the Members of the Company

Section 183- the directors directed not to use information accessed via the company contrary to company’s interest and for personal gain.

Section 184- Violation of section 180-183 in a reckless manner (Criminal sanctions)

Setion 588G- directors of an organization directed not to carry on the trading activities of the organization in case they suspect that the organization is about to become bankrupt or may get insolvent because if the transaction or they know such situation is bound to arise.

Section 206C- the court the disqualify the director to manage the organization

Section 1317E – court may impose pecuniary penalties for serious breaches of duties by directors.

In (ASIC) v Cassimatis Directors held to violate section 180(1) as a reasonable director would not have done so

In ASIC v Lindberg Director imposed with pecuniary penalties of $100000 as well as suspension from management for a year period.

In this case it is clear that the AB are on the verge of becoming insolvent. They do not have the funds to expand their business to the international markets. Their competitors have purchased 35% of their shares and are planning a takeover bid. The competitors are also known to change the executive directors after the takeover. In the given situation AB have issued more shares. This can be regarded as the violation of section 588G in relation to insolvent trading. In addition section 180(1) has also been violated as a reasonable director would not indulge in the breach of section 588G. Section 181 have also been breached as the directors are not acting in good faith and a proper purpose.

The directors have violated section 182 by using their position to pass such resolution as well as section 183 by using the information of company towards personal benefits. The directors have also violated the equitable duties of acting in good faith and proper purpose and not using position or information in case of conflict of interest to make personal gains.

The directors have indulge in an oppressive conduct in relation to Banjo has thus he can initiate proceeding under s 232 of the CA for an order under s 233. In addition the directors can be suspended from managing the corporation as per section 206C by the court and imposed with pecuniary penalties under section 1317E as done in the Lindberg case.

Conclusion

Therefore it can be concluded that the directors of AB have breached the statutory as well as equitable duties of directors by issuing the shares in order to achieve personal interest as well as trading when the company was insolvent. 

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