Legal Advice On Business Contracts And Shareholdings

Question 1

Question 1:

Kody and Ryder met whilst studying together at USC and have just graduated. Together they have decided to go into business selling unique, hand-made crafts and other gifts online. They decided to start a company (which they want to register with the name “Incredible Gifts Pty Ltd”) to source, market and sell these products online.

Ryder, keen to get started, approaches Melanie, a well-known local craft artist. Ryder negotiates a 12 month contract with Melanie for the design and provision of a range of unique hand-made gifts, for sale exclusively by Incredible Gifts. The contract is signed by both parties on the 26th April 2018 and provides for a monthly payment of $5,000.

When Kody and Ryder go to register Incredible Gifts Pty Ltd on the 2nd of May 2018, they discover that the name has already been registered. As such, they register the company Astounding Gifts Pty Ltd instead. Kody and Ryder are listed as the two company directors, and Astounding Gifts enters into an employment contract with Salman to act as the company’s accountant. Kody and Ryder each hold 45% of the company’s shares and Salman is given a 10% shareholding. On the 12th of May 2018, Kody and Ryder convene their first directors’ meeting. Kody is pleased to hear that Ryder has already managed to sign the exclusive supply contract with Melanie and they begin paying the $5,000 per month.

On the 10th of July 2018 Kody and Ryder find out that Salman has just accepted an accounting position with their competitor Incredible Gifts Pty Ltd and is trying to encourage Melanie to provide her hand-made gifts to Incredible Gifts instead. Kody and Ryder immediately call a members’ meeting and pass a resolution that alters Astounding Gift’s constitution to provide that directors may determine that the company can buy back shareholdings of less than 12% at their discretion. Astounding Gifts also refuse to continue to pay Melanie the monthly payments.

Advise:

A. Salman, what the process for altering a company constitution is, and whether she can prevent the inclusion of the clause allowing the directors to expropriate her shares?

B. Melanie, what recourse, if any, she has for the non-payment of her monthly payments for the remainder of her 12 month contract?

Question 2:

Chip-Eze Pty Ltd is a company involved in two business: the manufacture of potato crisps and other snack foods, which has been making a loss in the past few years, and the manufacture of frozen potato chips and other foods, which is reasonably profitable. The directors of the company are Michaela, Jordon and Marianne who each own 25% of the shares in the company. The remaining 25% of the shares are owned by five outside investors (Ayub, Saeed, Donte, Neeve and Faizah).

Chip-Eze have been having financial difficulties, with a number of outstanding payments to creditors—particularly the suppliers of the snack food side of the business. At a board meeting on the 1st of August 2018, Michaela proposes a resolution to incorporate a separate company, Freeze Me Pty Ltd and to transfer the profitable frozen foods business to this company. The resolution is unanimously passed.

On the 10th of August 2018, Freeze Me Pty Ltd is incorporated, the assets related to the frozen food business are transferred to it and all the customers and suppliers are updated with the new details.

On the 6th of August, Jordon had been approached by Faizah who had asked if she could purchase additional shares in Chip-Eze Pty Ltd. Jordon agreed to sell her an additional 5% of the shares himself, and they completed the transaction on the 8th of August. Upon application by creditors who had not been paid, the court orders that a liquidator be appointed and Chip-Eze Pty Ltd be wound up in insolvency. Archibald is then appointed as liquidator

Advise:

A. Archibald whether the directors of Chip-Eze Pty Ltd have breached s181 of the Corporations Act 2001 (Cth) or their equivalent equitable duties and what penalties or remedies might be applicable; and

B. Faizah whether she has an action against Jordon for breach of directors’ duties for selling her the shares in Chip-Eze Pty Ltd just before it was going into liquidation.

Question 1

1.As in the given case study, it can be seen that Kody and Ryder have started the organization named Astounding Gifts Pty Ltd. Both partners are agreed with the contract that they hold 45% of an organization’s share and remaining 10% will be given to Salman who work in the organization as an accountant.        

The main issues associated with the organization is that, salman as an accountant, has accepted an accounting position to its rival organization name Incredible Gifts Pvt ltd and also trying to encourage Melanie to provide her handmade gifts services to Incredible Gift pvt ltd instead of  Astounding Gifts Pty Ltd.

 As case study, it is observed that salman is working as an accountant in the organization Astounding Gifts Pty Ltd is breaching the corporate Act 2001(Cth). Formation of the important elements for effectively binding’s contract information is illustrated below;

• Agreements between partners: this contract cannot be unilateral contract. In this contract, both parties are agreed with the statement and terms and conditions. After successfully satisfying the contract by both parties agreement is done.  
• Consideration: in this process a bargaining needed mainly services, property, supply of money and promises.
• Capacity: in this elements both parties of the organization is entered into the legal relations
• Intention: in this elements by the parties of the organization can enter into the legal relations or enter the legally binding contract therefore that they perform better work at workplace
• Certainty: in this elements contract between the employees have been completed, clear etc.

Advise: Salman case study

The study shows that Kody and Ryder held 90% of share and remaining 10% of share held by Salman that judiciously permit them to change the constitutions of the organization as mentioned in section 136(2) of corporate Act 2001(Cth). In addition to this, it can be found that samlam who is an accountant of an organization held 10%, which prove to be beneficial for them to the majority of shareholders to amend the regulations to insert the clause to purchasing back share as mentioned in section 136(3) and 136(4). Thus the observation indicates that to change in the regulations of the business cannot be questioned by the other members as it is mentioned in Corporate Act 2001.  This can successfully proved that their action was bona fide and for advantage of the business, as mentioned in the case study of Shuttleworth v Cox Bros and Co (Maidenhead). 

The provision of act permit the majority of shareholders has an authority to pass a special resolution excluding other shareholders (minority shareholders) who held less than eleven percentages. However, the court also focused on the matter that whether minority shareholders are being demoralized with the decision of the minority shareholders. Therefore it is most important for the directors or majority shareholders to prove them the change in constitutions are beneficial for organization perspective. From the case study, it can be observed that both salman and Melanie doing unethical practices, because without any information they work to the competitor organization, which negatively hampered the organization performance and brand image. Moreover, in this situation, Winpar Holdings Ltd v Goldfields Kalgoorlie Limited case study is not adhered to this case study.  As per the given case study, it can be seen that Salman who is an accountant of an organization is accepted an accounting position of organization’s rival company such as Incredible Gift pvt ltd. Moreover it can be also observed that Salman not only accepted the job offer but also influence their partner to provide products and goods to that organization. Therefore this practice seems that Salman is doing unethical practices at workplace. Thus it can be said that organization directors has an authority change the regulations without involving minority shareholder. In this situation it can be said that salman has not an authority to sue a case against the organization.  

Advice for Salman

Advise: Melanie case study

As per regulations of the partnership mode of an organization, all business decision taken by this form of an organization requires to be taken with their partners jointly. Any decision made by the organization without the concern of their partners can known as the breaching of rules and regulations. This rules and regulations are mandated and necessary for all organization in Australia as per the Law of Australia. According to the Australia breaching rules and regulations, breach can be categorized by 4 fundamental elements including minor breaches, material breaches, fundamental breach as well as anticipatory breach. Minor breaching is applicable where non preaching partners cannot sue for particular performance and also can be damaged performance. A business contract makes certain commitments that are to be satisfied by the gatherings that entered into the agreements. Lawfully, one partner's inability to satisfy any of its legally binding commitments is known as a "breach" of the agreement. Contingent upon the specifics, a breach can happen when a partner neglects to perform on time, does not perform as per the terms of the assertion, or does not perform by any stretch of the imagination. Likewise, a breach of agreement will as a rule be sorted as either "material" or "unimportant" for reasons for deciding the fitting legitimate arrangement or "cure" for the breach. Most importantly it is said that if a party goes against the deliverables of the contract signed in between the parties and themselves then they would be considered as breaching the organization contract laws.

In other scenario it is seen that Malanie, who has exclusive contract with the organization Astounding Gifts Pty Ltd for 12 months with monthly payment $5000. It is seen that she also treated and practices breached of contract law as she is contract with the company for 12 months therefore they do not an authority to work for any organization. According to the Anticipatory breach of Australia contract law, if any unethically practice, then party has an authority to sue for damages in court.  In this situation, it is prime responsibities of an Astounding Gifts Pty Ltd to liable with their contract with partner. Melanie. The management cannot rectify the contracts as well after the organization got registered. Thereby, the situation shows that Astounding Gifts Pty Ltd is practicing violated the provision laid down under section 131 of CA 2001. Therefore in such situation it is recommended that Melanie needs to take legal action against the organization Astounding Gifts Pty Ltd and claim remaining payment as seen in the case study Lau v Bob Jane T-mart pty ltd.  In addition to this “Rankin v Marine Power International Pty Ltd” case study suggested that an organization cannot terminate the contract without giving proper reason or notice period. 

Question 2

2.Chip Eze pty is a private limited organization involved in two businesses including manufacturing snacks foods and potato crisp which are not generating much profits for the organization. It is seen that manufacturing potato chips as well as other foods is making reasonable profits for business. Profit earned by the organization is distributed 25% amongst each members and remaining 25% of share is distributed to its investors named Donte, Saeed, Ayub, Faizah and Neeve. The main issues associated with this case study are that directors of chip Eze pty ltd have breached the rules and regulations of s181 of the Corporation Act 2001. As in the given case study it is seen that Jordon sell his share of 5% to faizah without consent of their partners.           

Section 181 of the Corporation Act 2001 stated that directors of an organization have duties to execute their responsibities in successful manner. Failure to execute their responsibities would attract civil penalty under S1317E of CA.    

In case study, ASIC v Rich, pointed out that directors have a responsibilities to executes its roles in successful manner as mentioned in Section 181 of the Corporation Act 2001. The acts stated that directors can make a decision based on the situation and circumstances and for that they have judgment to disregard certain responsibities for interest of an organization. In case study, ASCI vs Adler, it was observed that directors violated several roles and responsibilities as stated under the section Corporation Act. The court declared that director breached Section 180 of the Corporation Act and section 181, which mentioned that director has no authority to misuse his/her duties. Section 183 and 206A said that directors responsibities in organization not to misuse their position and the financial information. 

Under the section s676 of the act, regular disclosure commitments apply to 'revealing elements (that is, publically listed organizations) where arrangements of the posting decides that apply to the element require the substance to tell the market administrator of data about indicated occasions or matters as they emerge with the end goal of the administrator making that data accessible to members in the market. Under the section 674(2) it is obtained that requires a recorded organization to advise the market administrator of data it is required to tell the market administrator of under the posting rules, where the data as well as information of an organization has not be available and it is 'data which a sensible individual would expect, on the off chance that it were by and large accessible, would materially affect the cost or estimation of' the organization's recorded securities. Under the section of ASX Listing Rule 3.1 a recorded organization that 'is or ends up mindful of any data concerning it that a sensible individual would hope to materially significantly impacted the entity prices must disclosed the data and information to ASX.

Advice for Archibald and Faizah

As per the given scenario it can be said that the organization must have to follow all rules and regulations in work practices and also implements both ASX LR3.1 and s674. Here in the scenario it can be found that without the concern of the directors or partners Jordan agreed to sell their share about 5% to investors i.e. Faizah. This would negatively impact on the organization performance and therefore it is roles and responsibilities for members to disclose the information under the section ASX LR3.1. Apart from that, it would likely to impact the individuals or investors who positively invest in organization in deciding whether to dispose or acquire of Chip –Eze Pty ltd.  Finally it can be said that organization has not disclosed any data and information and also considered it commercial in confidence.

Removing from a noteworthy advance, and is along these lines not a competitive innovation. Apart from that there would be not lawful prohibition on disclosing the data, this is not an incomplete proposal as well as data and information of an organization is not generated for internal management procedures. 

Advice Archibald case study

From the case study of Bell Group Ltd V Westpac Banking Corporation, it was found that director of an organization must act bona find for interest of a business as the shareholders or investors take monetary risks in order to provide support to business. Therefore in such situation avoid credits and liabilities suffered from business loss and opening new organization for matter would not unused the director of the organization from running their roles and responsibities. The directors cannot justify in court that they doing betterment for organization as making other problem cannot be taken as reasonable and ethical to save one’s organization. CORPORATIONS ACT 2001 - SECT 1317E said that if directors doing unethical practices at workplace and not exciting their responsibilities in ethical manner they should be charged. Section 183(1) is civil provision, by virtue of corporations act 2001 - sect 1317E, if court was agreed that the person has break section 183, then under S1317G, that the office, directors pay then commonwealth a financial penalty. “Storm Financial heads breached law case study” it is found that directors of an organization carry out their employment with diligence and care, by providing inappropriate advice to its clients.  In this study, court observed that storm was doing unethical practices and organization breached the Corporation Act S1180 (1). Therefore analyzing the case study of Storm financial, it can be said that Jordon who is the directors of the organization breach the Corporations Act 2001(cth) and also their roles and responsibilities.  Therefore, it can be recommended that Archibald to took all the above consideration and panelized then under the S1317G and 1317E, which involves the financial penalty up to $200000. Apart from that it is recommended that Archibald needs to take steps by withdrawing their directorship under corporations act 2001 – sect206C.

Advice 2 :faizah case study

Peskin v Anderson, case study stated that director failed to execute their responsibities in organization. In case study Coleman V Myer, court said that directors needs to holds certain duties and responsibilities towards individuals shareholders. In this study, it was mentioned that the organization’s directors has responsibities and duties to discuss foreseeable decision and material facts regarding organization with shareholders. It is mainly dependent on the factors that shareholders of the business can put trust on them or not.  Corporations act 2001 – Section 588G mentioned that director of an organization should not execute insolvency trading. Therefore, it can be said that Jordon has not an authority or liabilities to share any material information regarding the organization to individual’s shareholders such as Faizah. Thus in situation it can be said that individuals shareholders i.e. Faizah cannot sue against Jordon for not releasing the information about organization liquidation before purchasing her share. 

References

The Bell Group Limited v Westpac Banking Corporation (1997) 15 ACLC 8

Peskin v Anderson [2000] EWCA Civ 326

Australian Securities Exchange, Listing Rules (at 14 April 2014) r 3.1

Corporations Act 2001 (Cth) s674(1)

P Austin, Ian M Ramsay and H. A. J Ford, Ford's Principles Of Corporations Law (LexisNexis Butterworths, 2010).

Ted Wright, M P Ellinghaus and D StL Kelly, 'A Draft Australian Law Of Contract' [2012] SSRN Electronic Journal.

[1927] 1 Ch 154.       Shuttleworth v Cox Bros and Co (Maidenhead)

((2000) 18 ACLC 665) Winpar Holdings Ltd v Goldfields Kalgoorlie Limited

Richard Mitchell, Law, Corporate Governance And Partnerships At Work (Ashgate Pub., 2011).

Angela Schneeman, The Law Of Corporations, Partnerships, And Sole Proprietorships (Delmar Publishers, 1997).