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Challenging Directors And The Rule In Foss

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Question:

Discuss About The Challenging Directors And The Rule In Foss?
 

Answer:

Introducation

According to the general rule, that can be applied in the present case, it has been provided that the articles of association have a binding effect on the company and its members. As a result, the articles of Association of the company are treated as a contract that is binding for the company and its members regarding their rights and liabilities. In such a case, the law states that the member of a corporation can sue the company for the purpose of enforcing a right or to refrain from a beach of the articles. Hence, the company is bound by these articles towards all its management. Therefore, if there is a breach of the articles, the members have a right to restrain the company. For this purpose, the members may seek an injunction against the company (Ramsay, 1992). These provisions are also been incorporated in the corporations law of Australia. Therefore, the Corporations Act, 2001 provides in s 140 that the Constitution of the company has an effect of a contract formed under seal between (i) the company and each of its member; (ii) the company and its directors and company secretary; and (iii) between the members of the company. But at the same time, it also needs to be noted that the contractual effect of the constitution of the company is restricted to certain cases. As a result, those rights are provided to any other person by the common law in any other capacity. These circumstances were explained in Eley v Positive Life Assurance Co Ltd (1876). Eley was selected as the solicitors on the company for life. Later on, he also became a member of the company. The appointment of Eley as the company's solicitor was stated in the articles of the company. But after some time,

 


He was removed as the solicitors of the company. Due to this reason, he sued for infringement of contract. However, the court arrived at the conclusion that no rights are provided to Eley by the articles of Association of the company in any twisty, other than the member of the company. As a result of the fact that these rights were not affected, the court concluded that the action cannot succeed. In this way, the common law provides that the articles of association have to be treated as a contract present between the company and its members only (James, 2013). The same view has also been codified by the Corporations Act, 2001. This provision can be found in section 140(1)(a). Another important case in this regard is that of Hickman v Kent or Romney Marsh Sheep-breeders Association (1915). The articles of the company stated that in case a dispute arises between a member of the company and the company itself, such dispute should be referred to arbitration before anybody goes to the court. But in this regard of this provision, Hickman directly started court proceedings and the matter was not referred to an arbitrator first. Therefore, the company succeeded in achieving a stay of proceedings. While granting the stay, the court expressed the opinion that the memorandum and articles of the corporation have to be treated as a contract that exists among the corporation and each of its members (Whincop, 2001). The company, as well as any member can enforce this contract. Hence, when certain rights have been provided to an outsider in his capacity as such, and then the member later on becomes a member, such member cannot sue the company for the breach of the provisions mentioned in the articles. Under these circumstances, the law provides that rights cannot be enforced against the company, if the rights are purported to be given to a person by the articles, whether such person is a member of not and in any capacity, other than the member of the company, for example as a solicitor.

In view of the legal position mentioned above, in this question also it can be decided that Max cannot be allowed to enforce the clause present in the Constitution of Chocolate Cleaning Products Pty Ltd. , which provides that Max will act as the solicitor of the company for life and he can be removed only in case of negligence. This decision has been made on the basis of the fact that Max wants to enforce this clause not in his capacity as a member but as the solicitor of the company. Therefore, it cannot be said that the clause has a contractual effect in the present case. As a result, Max cannot be allowed to enforce the clause.

 


In this part of the question, the issue that needs to be decided if Max can prevent Chocolate Cleaning Products Pty Ltd from adding a clause in the constitution of the corporation which provides that the directors can expropriate his shares even if the other shareholders of the company have passed a special resolution in this regard. The corporations’ law provides certain rules. These rules have been introduced for the purpose of protecting the minority shareholders against any oppressive conduct (Schreiner, 1979). In this regard, the term minority operations can be described as the conduct covered by section 232, Corporations Act. In order to deal with such conduct, extensive powers are present with the courts to provide relief to the shareholders who are facing oppressive conduct. For example, oppressive conduct may take place when the majority is managing the affairs of the company, in such a way that is against the shareholders’ interests or such conduct proves to be oppressive, prejudicial or discriminatory for a particular shareholder (Hanrahan, 1997). Therefore, when the minority shareholders have to deal with some commercial unfairness, the provisions of section 232 are available to the minority shareholders. These provisions are wide enough and there are no restrictions present on the conduct that may be described as oppressive by the courts. In order to discover a particular conduct can be termed as oppressive, the courts use an objective test (Pentony, Graw, Parker and Whitford, 2012). Therefore the courts see if the conduct of the majority would be treated as unfair by any other reasonable person. On the other hand, the conduct of the majority cannot be considered oppressive only due to the reason that it has proved to be discriminatory or prejudicial for a particular shareholder (Chumir, 1965). In this regard, it is also required that the conduct should include an element of unfairness.

As a result, in this case also. It can be said that the conduct of the majority shareholders of Chocolate Cleaning Products Pty Ltd is oppressive, as it has been unfairly prejudicial to Max. As a result, Max can seek the prevention of the inclusion of the clause which provides that the directors of the company can expropriate his shares.

 


In this question, the issue arises if the resolution that has been passed by the executive directors of Aussie Boats Ltd. which provides that additional shares will be issued by the company for the purpose of thwarting the takeover bid of Millionaires on Water Ltd (MWB) can be considered as a breach of duty. In this regard, it needs to be noted that these directors are opposing the takeover due to the reason that they want to save their own position. It is generally known that the position of executive directors is terminated by MWB after the company has completed a takeover. But the position of non-executive directors is generally retained. As a result of this fact, Banjo needs advice if the executive directors can held liable for the violation of their duties.

In this regard, several duties have been imposed on the directors. These duties are present under the common law and also the statutory law. For example, the Corporations Act, 2001 provides the duties of the directors. The directors owe these duties towards their corporation. The duties imposed on the directors are based on the principles of good faith and accountability (Crosling and Murphy, 2009). The requirements that have been imposed on the directors by statutory law, as well as the common law in order to set the parameters for this duty, but at the same time, retaining the flexibility of these principles.

 


Therefore the law requires that while discharging their duties towards the company, the directors should give preference to the best interests of their corporation. Generally, it is believed that this phrase includes only the shareholders of the company. However, when the directors are making decisions on behalf of the corporation, there are several conflicting interests present before the directors (Shapira, 2003). Hence, in the recent years, the courts have expressed their willingness to provide more scope to the directors to keep in mind the interests of different persons who may be affected by their actions, without encroaching on the principle according to which the directors are required to act in the best interests of the corporation. The courts have also recognized that in order to act in the best interests of the company, it is not necessary that the director should disregard the interests of the other stakeholders including the auditing, employees and the wider community who may be affected by such actions. The reason is that it is in the best interests of the company that these interests should also be considered.

On these grounds, and the present is also it can be stated that the executive directors of AB had decided to counter the takeover bid only for saving their own position. It is well-known that after the takeover is complete, generally MWB abolishes the position of executive directors. As a result, it can be said that while making decision, there has been a breach of duty by the executive directors of AB. In this regard, the law requires that while making a decision on behalf of the company, the directors should keep in mind the best interests of the corporation. But in the present case, the executive directors of AB made this decision only with a view to protect their position and did not consider the best interests of the company. Hence it can be concluded that in this case there has been a violation of duty by the executive directors. As a result, the civil penalties mentioned in the Corporations Act can be imposed on these directors.

 

References

Crosling, G. M. and Murphy, H. M. 2009,How to study business law (4thed.) Sydney, NSW: Lexis Nexis

Shapira, G., (2003) ‘Shareholder Personal Action in Respect of a Loss Suffered by the Company: The Problem of Overlapping Claims and “Reflective Loss” in English Company Law’ 37 International Lawyer 137.

Ramsay, I., (1992) ‘Corporate Governance, Shareholder Litigation and the Prospects for a Statutory Derivative Action’  15 University of New South Wales Law Journal 149 at 156

James, N, 2013, Business Law (3rded.) Brisbane, QLD: Wiley.

Whincop, M.J. (2001) ‘The Role of the Shareholder in Corporate Governance: A Theoretical Approach’  25 Melbourne University Law Review 418 at 432-8

Schreiner, O. C., (1979) ‘The Shareholder’s Derivative Action – A Comparative Study of Procedures’  96 South African Law Journal 203 at 211

Hanrahan, P. F. (1997) ‘Distinguishing Corporate and Personal Claims in Australian Company Litigation’ 15 Company & Securities Law Journal 21

Pentony, Graw, Parker &Whitford, 2012,Understanding Business , Sydney, NSW, LexisNexis

Chumir, S., (1965) ‘Challenging Directors and the Rule in Foss v. Harbottle’ 4 Alberta Law Review 96

Eley v Positive Life Assurance Co Ltd [1876] 1 Ex D 88

Hickman v Kent or Romney Marsh Sheep-breeders Association [1915] 1 Ch D 881

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