1. The company shall only operate the business as an on-line electronic store.
As per s. 162, Corporations Act 2001, the given change in the company type is permissible. In order to proceed with the same, the first step is to pass a special resolution where the intended change in the company type should be ratified. A special resolution is one which should be ratified by least 75% of the shareholders who are voting either in person or through their respective proxies. Besides, the resolution, compliance with s. 163 and s. 164 is required.
Section 163 highlights that the application for change in company type needs to be lodged with ASIC (Australian Securities and Investment Commission). The various legal requirements are highlighted below.
- In accordance with s. 163-2(a), ASIC must be provided with a copy of the special resolution outlined in s. 162 and this must highlight the company type change along with specifying the new type and the new name that has been authorised by the shareholders.
- In accordance with s. 163-2(d), the company’s constitution consolidated copy also needs to be submitted if existing. Also, it needs to be highlighted if the section 738ZI would cover the company or not. Document highlighting the rights related to both issued and unissued shares must also be highlighted.
The ASIC on receiving the application vets the same in wake of s. 162 and s. 1623 requirements and then issues notice under s. 164 for altering the company details on the ASIC database besides publishing the same in the Gazette. Further, the company thus formed would not be a new company but would be the old company with a new type and a new name.
The key issue is to determine if Ann and Bill would be successful in preventing Yung from starting a competing business under the non-compete clause present in the employment contract.
In accordance with s. 124(1), a company is a separate legal entity and it exists independent of the owners. Also, based on this, the principle of corporate veil has been incorporated as highlighted in the Salomon v A Salomon & Co Ltd. This case highlighted that the shareholders of the company cannot be held liable for the outstanding liabilities of the company owing to the company being a separate entity from the owners.
This potential immunity that is extended under the company structure is prone to misuse and potential abuse if a company is incorporated so as to engage in any activity that could lead to legal implications. In view of this, the court allows that in select cases, the lifting of corporate veil may be allowed so as to understand as to who is the controller of the firm. One of the cases that is relevant to the situation presented is Gilford Motor Co Ltd v Horne  Ch 935. As per the relevant facts of this case, Horne (the defendant) was an employee with Gilford Motor Company. During employment, non-compete agreement was signed which was valid for 3 years after termination of employment. Horne decided to compete with the motor company during the period when the agreement was still applicable. To escape breach of the contract, a company was formed which had his relatives and friends as shareholders. The court decided that the defendant has breached the non-compete agreement since Horne and the company were one entity only as the company was formed only as an instrument of conducting fraud. This highlights that even though company and owners are different but in case of using company as an instrument for committing fraud, the veil may be pierced and the controller may be punished.
As per the relevant details, it is apparent that as part of the employment contract with former managing director Yung, there exists a clause as per which Yung cannot engage in a competing business with that of the company. This non-compete clause is valid for a period of three years after termination of employment. However, Yung after termination of his employment forms another company which intends to compete in the same business as the former employer.
In accordance with the verdict in the Gilford Motor Co Ltd v Horne case, it is apparent that Yung cannot claim immunity under the argument that company and himself are two separate entities and thereby company can engage in any business that it wants. In this matter, the court would pierce the corporate veil and highlight that the company is essentially being used as an instrument of conducting fraud and hence, a restraining order would be issued.
Based on the above discussion, it may be concluded that Ann and Bill would be successful in getting a restraining order to stop Yung from setting a competing business.
The central issue is to determine whether an action which violates the company constitution would be termed as void or not.
In accordance with s. 136, a company may have a constitution which can be modified through a special resolution. Further, s. 125 states that the constitution tends to set out the objects of the company and also can potentially limit the use of power. The effect of constitution is highlighted in s. 140, Corporations Act 2001. Contractual force is provided to the company constitutions as per s. 140(1) which highlights that this document tends to be a contract between the following parties.
- Between each member and the company; and
- Between each of the directors and company secretary and the company; and
- Between each of the members and any given member
However, with regards to application of the company constitution as statutory contracts, courts have usually been apprehensive. This is on account of constitutions acting as statutory contracts and thereby lacking the normal elements of a contract. With regards to the interpretation of the company constitution, the following observations made by the Federal Court in Lion Nathan Australia Pty Ltd v Coopers Brewery Limited are significant.
- A company constitution has a comparable nature to that of a commercial contract and hence it is essential that it needs to be construed in a manner which provides reasonable business efficacy.
- Just like other commercial documents, company constitution must be read and interpreted as a complete document so that the underlying purpose which it intends to serve can be brought to light.
- For interpretation of the company constitution, it is imperative that not only the text but the overall context must also be considered. Additionally the purpose of the clause should also be considered. The general principles which may be applicable to a given circumstance would also apply in cases involving breach of company constitution but in a more restricted sense.
- Even though courts have not been proactive with regards to implying constitutions and associated terms, but it does not imply that these provisions do not apply or actions in contradiction of these can be undertaken.
In case of an innocent party impacted due to breach of company constitution, then suitable damages would be provided.
In the given case, it is known that ABY-Tron Ltd intends to set up an electronic store in a shopping centre and hence execute a lease agreement for implementing the same. However, as per the constitution of the company, this is not permissible since the company is into online electronics. It is apparent from the s. 140(1) that the company constitution serves as a contract between the members and the company. In the given case, the company constitution clearly highlight that the object of the company is to engage in online electronics sale. However, the company is now trying to make a foray in the brick and mortar format. Clearly, the members would have reasonable concerns regarding the same and hence the lease agreement would be held as void if the members object citing the statutory authority of the company constitution in the case . Further, the shopping centre could sue the company and ask for damages.
The relevant provisions of the Corporations Act highlight the statutory nature of contract formed on the basis of company constitution. Therefore, in this case, the lease agreement can be nullified iif the members object to the same and have valid concerns regarding the same. The shopping centre would be compensated for the cancellation of lease.
The key issue is to tender legal advice to the directors of ABY Tron Ltd if they can cancel the contract with a supplier on the premise that the managing director has violated the constitution during inappropriate enactment of the contract.
A company is a separate legal entity capable of enacting contracts but these contracts would be executed on behalf of the company by the agents. While agents are delegated contract making authority, it is also possible that there would be certain cases where the contract with the third parties may have been executed without adequate authority. In these cases, the interest of the innocent parties that have been entered into contracts in good faith has to be safeguarded. This can be done through the application of indoor management doctrine which was outlined in the Royal British Bank v Turquand (case. In accordance with this doctrine, if the third party enacts a contract with the company or any of the agents, then such a contract cannot be declared as void if it is found that the agent lacked the authority required for execution of the contract or the actions of the agent were found to be inconstant with the instructions of the principal. This protection is extended since the outside party is not aware of the internal workings of the company and hence an assumption can be made that requisite authority does exist. However, this protection does not hold good when either the third party is aware that the agent lacks the necessary authority for execution of contract or has reasonable doubt about the same.
This common law position is also reflected in stature through the s. 128 and s.129 Corporations Act 2001. A key assumption that can be made by third party while initiating contractual relation with the company under s. 129 is that the concerned agent has the requisite authority from the principal for contract execution. Further, s. 128(3) specifies that the assumption by innocent party would continue to hold even if the conduct of the agent is fraudulent. Additionally, s. 128(4) clearly highlights that assumptions under s.129 would not hold if third party is aware that the agent lacks the necessary authority for execution of contract or has reasonable doubt about the same.
While entering into contract with CTC Ltd, Yung did not seek the approval of all the directors which was required as per the company constitution. Thus, Yung did not have the necessary authority for entering the given contract. However, the outside party i.e. CTC Ltd does not know about the lack of authority and considering Yung is the MD of the company, the outside party is correct in assuming that Yung is authorised. Thus, despite lack of authority, the contract would be considered as binding on the company under the assumptions of s. 129 along with doctrine of indoor management. Hence, the delivery of LCD television would have to be taken by the company and requisite payment would have to be made.
In wake of the above discussion, it would be appropriate to conclude that despite the lack of authority for Yung, the contract would be enforceable and the company would have to make the payment and take delivery of LCD television.