Corporate Liability And Pre-registration Contracts Under Corporations Act Essay.

1.What is the significance of s 124 of the Corporations Act?

2.Explain the organic theory of attribution in determining corporate liability.

3.What is the difference between primary and secondary liability?

4.How do ostensible authority and actual authority differ? What effect does this have on a corporation’s liability?

5.What is the aim of the indoor management rule and how does it operate? Explain with reference to a relevant precedent.

6.What statutory protection exists under the Corporations Act for the protection of innocent third parties contracting with the company? What limitations, if any, are there to these assumptions? 

7.Who, in law, is a promoter are what are their typical functions?  

8.What duties does a promoter owe to the company at common law?

9.To whom must a promoter make disclosure?

10.Explain the meaning of a pre-registration contract.

11.What is the impact of ss131–133, Corporations Act on the common law?

12.When is a company bound to a pre-registration contract?

In the month prior to the sale of the property by Alicia to Batco Ltd, she was

informed by the Sydney town clerk that Pitt Street was to be converted into a pedestrian mall and permanently closed to motor vehicle traffic. She was advised to immediately apply to the Sydney City Council for consent to have the property rezoned for other commercial purposes. Alicia did not do so, neither did she disclose this information to Batco Ltd.

Advise, with reasons:

(a) Is Alicia a promoter?

(b) If she is a promoter, what legal duties does she owe to Batco Ltd?

(c) Is Alicia is entitled to retain her profit?

(d) What remedies Batco Ltd and its shareholders may have against her?

Organic Theory of Attribution in Determining Corporate Liability

Having come up with an idea to start a subscription business that provides with highly entertaining podcasts an interviews, Sammy and Huw approach Gracey for exclusive supply of a weekly podcast to their new company. They sign an agreement on the 20^th April 2018 stipulating that for the exclusive rights, Gracey is to be paid a fee of $4000 per month for a period of one year.

They initially intended to name the company Gosh Pty Ltd. however, when they went to register the company on 1^st May 2018 the name was already in use. In its place the two opted to use Oh My Pty Ltd as the name of the company with Huw and Sammy as the listed directors. The newly formed company employs Amaya as the company accountant. The shareholding is 45% each for the directors and 10% for Amaya.

On 1^st July 2018, both Sammy and Huw realize that Amaya has agreed on a contract appointing her as the accountant for a competing firm Gosh Pty Ltd. Moreover, Amaya is soliciting Gracey to abandon Oh My Pty Ltd. but instead provide the exclusive weekly podcasts to her new employer instead.

In an emergency member’s meeting, both Sammy and Huw agree to alter the company constitution allowing directors to buy back shareholdings from shareholders with less than 11% at their discretion.

The constitution of a company covers the powers, rights, and duties of the firm, the executives, the board, and those of the different shareholders. It is a pact between the firm and its members, company and its secretary, the organization and each director, and amongst the company members. According to the Corporations Act 2001 sect 136, a company is allowed to implement a constitution before or after the company is registered. When embraced prior to the registration process, all members must in form of writing agree to the terms set forward by the constitution. In a care where the adoption of the constitution comes after the registration process, a special resolution of the adoption is passed.

As per the corporations act, the company is allowed to alter or revoke its constitution by adopting a special resolution which needs a minimum of 28 days’ notice for public companies and 21 day notice for other types of company. For the resolution to be formalized and adopted as part of the company constitution, it must be supported by a minimum of 75% of the shareholders. The amendment to the company constitution is binding. However, according to section 136 (2) of the Corporations Act, the amendment must first comply with certain specified additional requirement to make it effective. For instance, the additional requirement may include the amendment requiring the approval of a specific individual, or the resolution to amend be voted for unanimously by its shareholders. In case the constitution has specified requirements, the specific requirements must first be fulfilled prior to the amendment takes effect.

Difference between Primary and Secondary Liability

Such additional requirements can be negotiated by the minority as a means to offer some form of protection from resolutions made by the majority shareholders bearing extensive financial consequences. As such, these requirements make it difficult for majority shareholders to amend the constitution. Nevertheless, a company cannot limit its statutory powers to change its constitution and the constitution cannot have a statute that bars the company from making any changes to the constitution, as such, restrictions or provisions would be void. The Corporations Acts and the common law however shields the company’s shareholders from the variations or annulment of class rights, various amendments to provisions of a firm’s constitution that have the impact of expropriating the shares of the minority or rights ascribing to those shares; and revisions to precise provisions of the firms constitution.

The supremacy of majority shareholders to amend the constitution for expropriating the shares of a minority shareholder or valuable rights bestowed upon those shares is limited following the decision of the High Court of Australia in Gambotto v WCP Ltd (1995) 182 CLR 432. The court held that for such an amendment conferring upon the majority shareholders powers to expropriate powers of the shareholders must first satisfy the following; it is for an appropriate purpose and not meant to oppress the minority shareholders. The court further held that the process require complete disclosure of key information, an autonomous assessment of the value of the shares by an expert, and imbursement of the shareholding at market value.

Based on the ruling of the Gambotto case, expropriation is only allowable on the grounds that minority’s continued shareholding would be injurious to the firm. Other grounds include where the minority shareholder is in direct competition with the firm, and by the act of expropriation the company would be in a position conform with the principles governing the principal business is involved in, or where the expropriation would be to protect the interests of the firm. Expropriation is illegal where its aim is for the majority to secure themselves increased benefits of a new corporate structure or from an economic undertaking.

Plaintiff’s advice

Based on the rules governing the alteration of the constitution of a company, Amaya had no legal redress in the court of law as the changes satisfied all the quotas of alteration. Base on the facts of the case, Oh My Pty Ltd constitution did not have any requirement that had to be met before any alteration of the constitution commenced. Furthermore, by her position as an accountant in a competing firm and by soliciting Gracey to offer the exclusive rights to her new employer allowed Sammy and Huw to expropriate her shares. Her association with Gosh Pty Ltd. as an accountant was a direct conflict of interests for the two competing firms. Her continued shareholding would therefore be detrimental to Oh My Pty. Ltd and by removing her; they would be advancing the interests of the company. Her first action in her capacity as the accountant at Gosh Pty Ltd was to solicit Gracey to join Gosh Pty ltd. a company in direct competition with Oh My. The company constitution did not grant her the powers to prevent the inclusion of the new clause in the constitution limiting a company’s statutory powers to amend its constitution and the constitution cannot have a clause forbidding the constitution from amended; as such restrictions or provisions would be invalid.

Ostensible Authority and Actual Authority in Corporate Liability

Gracey

In as far as, Gracey is concerned; she has not bleached the contract yet. The burden of proof lay with Oh My Pty, as they were the ones who stopped her monthly payments and the ones who had to proof to the court that she had bleached their contract yet. Their contract signed between the two parties gave Sammy and Huw exclusive rights to her weekly podcasts for which she would receive $4,000 monthly for a period of one year. By the mere fact that Amaya was encouraging her to offer her podcast to Gosh instead of her former employer did not equate to her actually providing her podcast to Gosh. There was nothing wrong with her talking to Amaya. The bleach of contract would come into play only if she went against the stipulation of the contract by giving her podcast to Gosh despite the existence of the exclusive rights with Oh My Pty.

Gracey can sue for damages as a party found to be in breach of contract is liable for losses incurred due to the breach. The purpose of a breach is to place the afflicted body or person in equal position they would have being if the breach had not occurred and the contract was properly fulfilled. In the case Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 it was held that the afflicted parties should be placed in equal position to what it would have been provided that the contractual obligations were fulfilled. However, the plaintiff must prove that they suffered a loss and the actual amount of the loss or damage so that they could recover the compensations. Therefore, the quantity of damages that is being demanded ought to be clear and must be quantified. In the case Airloom Holdings Pty Ltd v Thales Australia Ltd [2011] NSWSC 1513 it emerged that the burden is on the party requesting indemnities to comprehend from the onset that the quantity of damages they are seeking and what concurrent material required to support the assertion.

The duties of a director are mainly concerned with the governance of the relationship between the directors and the company where they offer their services as the directors. The duties of the directors are owed to the firm as a whole. In their capacity as the directors, directors often find themselves in a fiduciary positions vis-à-vis the company’s creditors especially during financial situations. Moreover, there are situations though limited where the directors have valid duties, which they owe to specific or individual shareholders. The vital principle governing the directors’ tasks is that the directors must conform to the corporations Act 2001 (Cth). Section 181 of the Corporations Act executes a civil requirement on directors and other officials in an organization to implement their powers and discharge their duties in good faith, in the best interests of the corporation and for a proper purpose. Failure to execute one’s duty as a director, the director is open for civil or criminal or a hybrid of the two offences.

Indoor Management Rule under Corporations Act

The burden of proof lies with Lily Mae who must convince the court that in splitting the company the directors did not act in good faith. She must prove that the directors exercised their powers to benefit themselves, confer upon a third party or a class of shareholders additional benefits, or to damage the firm itself. If she can prove this then the duty of the directors will have being breached attracting civil actions against the directors. The duty of good faith is based on the intention, the belief, and the motive of the directors and whether any decision made was made based on the interest of the company as the principal consideration.

Drink It Up Pty ltd is involved in two businesses one which bottles and markets springs water and the other involved in the production and marketing of organic fruit juices. The water section is profitable whereas the one involved in organic juices has a being facing financial challenges in settling its financial obligations. The directors of Drink It Up Pty unanimously vote for the registration of a new company H20 Pty Ltd where they will transfer the profitable unit (water production and marketing). This is done on the 7^th of July 2018, and all the assets related to the spring water are transferred to and all its customers and suppliers are informed of the changes.

S181 of the Corporations Act 2001

As a director, when discharging their duties they must do so in good faith and in the best interest of the firm. They must discharge their duties whilst avoiding conflict of interests and must manage any conflict that may arise. While acting in good faith they must do so honestly in such manner that is inspired by the firm’s best interest, as would be evaluated by an able officer in the director’s position. Their actions must be in fulfilment for proper purposes translating to not being involved in actions that any reasonable person would perceive as a contradiction to the purposes or the activities of the enterprise. Moreover section 180 (1) of the Corporations Act state that a director must execute their powers whilst showing a certain degree of care and diligence that any practical individual would exercise if they were directors or were in similar position holding similar obligations as those of an officer functioning as a director.

The power to manage a company is granted to the directors by the company. In the case, Re Smith and Fawcett Ltd. [1942] Ch 304 Lord Greene MR held that, “The principles to be applied in cases where the articles of a company confer a discretion on directors … are, for the present purposes, free from doubt. They must exercise their discretion bona fide in what they consider - not what a court may consider - is in the interests of the company, and not for any collateral purpose.” Based on this, the duties of a director are subjective and are dependent upon the director executing their discretionary powers bona fide in what they and not the court would consider as acting in the best interest of the company.

Protection of Innocent Third Parties Contracting with the Company

Directors have a duty to act in good faith what they envisage as functioning in the best interests of the firm. If their intentions are genuine and they justly believe that, what they are doing truthful for the company, directors are safeguarded from accusation that they would have done something differently. From the inference above, the directors of Drink It Up Pty did not breach s181 of the Corporations Act 2001 or any other duty. Voting unanimously to split the business in two separating the profitable spring water business from that of juice was in the best interest of the company. That way the liabilities of the loss making department would not tamper with those of the profit making unit that way the business unit dealing with the water was a going concern having being saved from winding up. As a director, one must take relevant steps to help reduce losses to the creditors in case the business became bankrupt.

Dhruv

Based on the fact that Dhruv was an investor and a shareholder of Drink It Up, he ought to have performed due diligence on the financial position of the company before seeking additional shareholding. He was the one who approached Kristofer with an offer to purchase an additional shareholding, which was accepted, Kristofer reduced his shareholding by 5%. Although Krostfer was privvy of the information regarding the financial position of the company, Dhruv being a shareholder had access to such information as well but still proceeded with the acquisition. The purchase did not affect the structure of the company and its impact was insignificant, in his capacity as a director, he was allowed to dispose his shares provided that the sale is disclosed to other directors. The burden of proof in this lies with Dhruv who must show to the court that Kristofer acted mali fide and his actions contradicted those of the directors. Shares of a company that has being liquidated are worthless. Dhruv has no legal redress against Kristofer.

References

Airloom Holdings Pty Ltd v Thales Australia Ltd [2011] NSWSC 1513

Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199 per Isaacs J at 217

Australian Securities & Investments Commission, 2018. Directors’ liabilities when things go wrong. Directors Liabilities Things Go Wrong. URL https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-liabilities-when-things-go-wrong/ (accessed 9.12.18).

Commonwealth Consolidated Acts, 2018. CORPORATIONS ACT 2001 - SECT 181 Good faith--civil obligations. URL https://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s181.html (accessed 9.12.18).

Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64

Corporations Act 2001 sect 136

Corporations Act 2001 sect 181

Gambotto v WCP Ltd (1995) 182 CLR 432

Hindle v John Cotton Ltd (1919) 56 Sc LR 625

Parliament of Australia, C., 2018. Chapter Four - Directors’ duties. URL https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Completed_inquiries/2004-07/corporate_responsibility/report/c04 (accessed 9.12.18).

Queensland Goverment, 2018. 7.3 Corporations Act 2001 (Cth) (the Corporations Act). URL https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx (accessed 9.12.18).

Re Smith and Fawcett Ltd. [1942] Ch 304

Tomasic, R., Bottomley, S., McQueen, R., 2002. Corporations Law in Australia. Federation Press.

Treasury, 2018. Corporations Act 2001. Federal Registration Legislation. URL https://www.legislation.gov.au/Details/C2017C00129/Html/Volume_1, https://www.legislation.gov.au/Details/C2017C00129 (accessed 9.12.18).