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Law Assignment: Questions on Corporation Act 2001

Question

Question 1
Truth Enterprises Ltd (Truth) is a company that was incorporated in 2008. The constitution of Truth has the following stated object:

“the business of the company is to invest in online retail fashion stores”.

Truth has three directors, Rhonda, Maria and Miranda, who together own 20% of the company’s shares. The remaining shares are split equally between four investors: Mr JJ, Mrs Cale, Mr Giuseppe and Dr Rice.

Since incorporation, Truth has not returned a great deal of profits to members. Mrs Cale, Mr Giuseppe and Dr Rice think they have an idea to greatly enhance the profitability of Truth. They put forth a proposal at a members’ meeting that Truth should purchase a number of high-end retail fashion stores (i.e. “bricks and mortar” businesses).

Rhonda, Maria and Miranda are not keen on the members’ proposal. However, the three directors are informed that they will be removed from the Board if they do not comply with the proposal of Mrs Cale, Mr Giuseppe and Dr Rice. Although Mr JJ does not support them, Mrs Cale, Mr Giuseppe and Dr Rice have sufficient voting power together to action the removal of the three directors. Therefore Rhonda, Maria and Miranda feel compelled to act in accordance with the wishes of the 3 shareholders.

Question 1: Answer all parts A, B, C and D
A). Identify which section of the Corporations Act 2001 (Cth) gives members the power to remove directors in a company such as Truth Enterprises Ltd (1 mark).

B). Identify which section of theCorporations Act 2001 (Cth) gives members the power to appoint a new director in a company such as Truth Enterprises Ltd (1 mark).

C). What are the requirements to be appointed as a director? Refer to the relevant sections of the Corporations Act 2001 (Cth) in your answer (3 marks).

D). Discuss the consequences of a breach of constitutional objects for Truth Enterprises Ltd and its directors and shareholders, making reference to the relevant sections of the Corporations Act 2001 (Cth) (20 marks).

Question 2.
Fenner Fashions Ltd designs fashion items, including clothing, accessories and cosmetics. Fenner Fashions has three directors on its Board, and these directors are also directors of a subsidiary company of Fenner Fashions called Mean Beanies Pty Ltd (Mean Beanies). The three directors are majority shareholders in both Fenner Fashions and Mean Beanies.

During August of 2019, Mean Beanies contracts with another company, No Sale Pty Ltd, for the purchase of goods to the value of $250,000. In due course, No Sale Pty Ltd fails to deliver the goods to Mean Beanies, and the company does not refund any money to Mean Beanies.

The three directors of Mean Beanies decide not to commence legal action to recover the $250,000 from No Sale Pty Ltd. They simply advise: “it would not be an advisable course of action”. This decision results in a major loss for Mean Beanies that also has a serious financial effect on Fenner Fashions.

The minority members of both Fenner Fashions and Mean Beanies are concerned with the way the company is being run by the 3 directors, and so they seek legal advice.

Question 2: Answer both A and B
A). Outline the liability of the directors in terms of their duties under the Corporations Act 2001 (Cth). Have the directors breached their duties to either Fenner Fashions or Mean Beanies? (10 marks).

B). Identity the possible remedies that the minority members could seek against Fenner Fashions and Mean Beanies. Consider whether the minority members are likely to be successful (15 marks).

Answer

Answer 1
A). Identify in the present context of Law Assignmentthat which section of the Corporations Act 2001 (Cth) gives members the power to remove directors in a company such as Truth Enterprises Ltd?

Truth Enterprises Ltd is a Private company. The four members of the company Mr JJ, Mrs Cale, Mr Giuseppe and Dr Rice decided to remove the three directors, Rhonda, Maria and Miranda. The members hold 80% of the shares in the company. Under section 203C of the Corporation Act 2001, a proprietary company has the power to remove the directors by passing a resolution with effect to the same. However, as per section 203CA (1) of the Corporation Act 2001 reviewed in this Law Assignment, the resolution passed under section 203C of the Act have no effect if there is no single director left after the removal of the directors and such resolution is held to be void in nature. (Bruce, 2014)

B). Identify which section of the Corporations Act 2001 (Cth) gives members the power to appoint a new director in a company such as Truth Enterprises Ltd?
Whenever a company decides to remove its directors under section 203C of the Act, then, as per section 203CA (1) of the Act 2001, the resolution have no effect if there is no single director left after the removal of the directors and such resolution is held to be void in nature.

But, section 201G of the Act grants power to the members for the appointment of new directors in the company. The director can be appointed by passing a resolution to the same effect in the general meeting of the member. (Bruce, 2014)

C). What are the requirements to be appointed as a director?
As per section 201A of the Corporation Act 2001, it is necessary that there must be at least one director in a proprietary company who must ordinary reside in Australia. As per section 201B of the Act considered in this section of Law Assignment, defines the person who can become a director.
Any person can become a director provided: (Bruce, 2014)

  1. He must be an individual of 18 years of age;
  2. It is necessary that the person must be apt to act the management of the corporations as per Part 2D.6 of the Act;
  3. It is also necessary that the appointment must be made by ASIC under section 206F of the Act or a leave must be sought from court under section 206G of the Act.

D). Discuss the consequences of a breach of constitutional objects for Truth Enterprises Ltd and its directors and shareholders within this Law Assignment?
Truth Enterprises Ltd (Truth) main object was that the company business is to invest in online retail fashion stores. The four members of the company, Mr JJ, Mrs Cale, Mr Giuseppe and Dr Rice, with 80% of the shareholdings decide that the company must buy high-end retail fashion stores. The three directors, Rhonda, Maria and Miranda, with 20% of the shareholdings, did not agree to the same as the action is contrary to the object clause of the company. Once a company is registered under section 119 of the Act, then, it is held to be a separate legal person in law and as mentioned under section 124 of the Act reviewed in the Law Assignment.

Generally, under common law, the company is bound by the acts of his agent only when the same are within the preview of its object clause. The acts which are beyond object clause are ultra-virus and thus invalid. However, Section 125(2) states that no company’s act is held to be invalid merely on the ground that the same is not as per the requirement of the object clause or is contrary /beyond the object clause. Also, as per section 125 of the Corporation Act 2001 considered herein Law Assignment, the constitution of the company can limit the powers of the company through its object clause. Section 125(1) of the Act submits that an express restriction/prohibition can be imposed on the power of the company. However, if the company exercise such restricted/prohibited power, then, such act is not held to be invalid merely on the ground that it is opposed to the restriction/prohibition. (Gullifer & Akseli, 2016)

So, breach of section 125 cannot be construed as ultra-virus and must be enforced as per the contracts under section 140 of the Act. As per section 140 (1) of the Act discussed in the Law Assignment, the provisions of the constitution of the company have the same effect that of a contract which exists amid the company with its members, between the company and its directors and amid the members with the other members of the company.

Now, if there is a breach in the provision of the condition, including that of the object clause, then, such an action cannot be regarded as the violation, however, remedies can be ascertained by the aggrieved members or the directors as the breach of the statutory contract that existed amid them. (Kramer, 2017)

In the same way, if the members of the Truth Enterprise Ltd have entered into any transaction that is beyond the object clause of the company, them, by applying section 125 of the Act, it can be said that the transaction is not merely invalid on the ground simply because it is not in compliance of the constitution. Rather, any aggrieved director or member has the right to act as per section 140 of the Act and consider the action as the breach of a contractual relationship that existed that with the other members, directors and company.

The consequence that may follow from the breach of the object clause of the company constitution includes the following points presented in the Law Assignment:

  1. The action against the directors, if involved in the breach, for the breach of their duties;
  2. Oppression action can be sought the members of the company;
  3. The aggrieved persons can also seek the winding up process of the company.
  4. The interest of the outsiders will be safeguarded conside5ing that the outsiders are dealing with the company in good faith.

These are the matters of internal; proceedings which must be sought by the company.
Thus, the various above consequences noted in the Law Assignment will follow if Truth Enterprise Ltd will act outside its object clause considering that the transaction is nit ultra-virus merely on the ground that it is beyond the object clause.

Answer 2
A). Outline the liability of the directors in terms of their duties under the Corporations Act 2001 (Cth). Have the directors breached their duties to either Fenner Fashions or Mean Beanies?

Fenner Fashions Ltd is a company with subsidiary, Mean Beanies Pty Ltd. Both the company have same directors who are also the major shareholders in the company. Mean Business contracted with No Sale Pty Ltd for buying goods @ $250,000. No Sale Pty Ltd did not provide goods and in return the company does not refund any money to Mean Beanies. It is seen in the context of Law Assignment that later, no legal action was taken for the recovery of $250,000 and this resulted financial loss to Mean Beanies and Fenner Fashions. In these situations, there are several duties that are violated by the directors:

  1. Duty of care and diligence- section 180 of the Act. As per ((ASIC) v Cassimatis (No. 8), 2016), the acts of the directors must be carried out diligently and with care so that no adverse effect is imposed on the company. But, the directors of Mean did not acted diligently, rather, they did not took any legal proceedings to safeguard their financial interest.
  2. Duty to act with honestly – section 181- the acts must be carried with full diligence. And is highlighted in (Re Smith and Fawcett Ltd Ch, 1942).
    The acts of the directors of Mean are not carried out with honesty as they keep the interest of the shareholders at stake.
  3. Duty to avoid insolvent trades – section 588G of the Act – No financial burden should be taken by the directors which resulted in insolvent trading of the company and is discussed in (Woodgate v Davis, 2002).

By imposing the financial burden on the shareholders of Fenner and Mean, the acts may result in the insolvent trading of the company.
So, there are several penalties as mentioned in the next section of Law Assignment that can be faced by the directors which includes: (Kramer, 2017)

  1. Civil – breach of section 180-183, 588G, 209 of the Act when beached results in civil penalties which includes:
    1. Fines @ $200,000 under section 1317G of the Act;
    2. Compensation under section 1317H of the Act;
    3. director can be disqualified under section 206C of the Act;
  2. Criminal - section 184 of the Act also imposes criminal liabilities which includes:
    1. criminal penalty can be imposed for dishonest behaviours;
    2. breach of section 588G imposes find of $200,000 or jail of 5 years;
    3. director can be disqualified under section 206B of the Act;

B). Identity the possible remedies that the minority members could seek against Fenner Fashions and Mean Beanies. Consider whether the minority members are likely to be successful.
As submitted that Mean Beanies Pty Ltd is the subsidiary of Fenner. Mean entered into contract with No Sale Pty Ltd for $250,000 purchase of goods. Goods are not su0pplied by No Sale Pty Ltd and so no payment is made by Mean Beanies. Later Mean did not take any action for the recovery of $250,000. This decision hampers the financial position of Mean Beanies and Fenner Fashions. In their situation as portrayed in this section of Law Assignment, it is submitted that the minority shareholders can take action against Fenner Fashions and Mean Beanies under two broad categories:

I. Action under section 232 of the Act – the action under section 232 of the Act is called the action of oppression remedy. In simple terms when the acts of the shareholders are such that it is oppressive of is found to discriminatory to the minority shareholders of the company, then, as laid down in ( Morgan v 45 Flers Avenue Pty Ltd, 1986), the minority shareholders are empowered to bring an action of oppression against the company and the majority shareholders. If the court is of the opinion that the application made under section 232 of the Act is legitimate, then, in pursuance of section 233 of the Act, the court may bring variation to the constitution or provide compensation or wind up or take over the corporation. In the given situation of Law Assignment, the minority shareholders of Fenner Fashions and Mean Beanies can bring an action under section 232 of the Act and seek remedy mentioned under section 233 of the Act as the decision of Mean of not pursuing any legal action for the recovery of @$25,000 brings financial burden on the company and the company might become bankrupt.

II. Action under section 236 of the Act –As per the investigation carried on this Law Assignment, the action that is bought under section 236 of the Act is called the statutory derivative action of the company. At times, the actions of the company through its majority shareholders are such that it is not in favour of the company or the other shareholders of the company and is analysed in ( (Swansson v Pratt, 2002). In such situation as stated in the Law Assignment, when the aggrieved shareholder of the company is of the opinion that the company is not willing to bring any action against such defaulters, then, the individual shareholders on his own bring an action under section 236 of the Act. However, as per (Cassegrain v Gerard Cassegrain & Co Pty Ltd, 2008), the aggrieved person can only bring the application provided he himself is bring the action with honest reasons and clean hands.

In the given situation presented in the Law Assignment, Fenner Fashions and Mean Beanies individual shareholders who are aggrieved can on their individual account bring action against the company for the losses that might be suffered because of the actions of mend. This is only when the individual shareholders are of the opinion that the company is not taking any responsibility to bring action on their behalf. ?

Bibliography
Morgan v 45 Flers Avenue Pty Ltd (1986).

(ASIC) v Cassimatis (No. 8) (2016).

Bruce, A., 2014. Consumer Protection Law in Australia. s.l.:LexisNexis Butterworths..

Cassegrain v Gerard Cassegrain & Co Pty Ltd (2008).

Gullifer, L. & Akseli, O., 2016. Law AssignmentSecured Transactions Law Reform: Principles, Policies and Practice. s.l.:Bloomsbury Publishing.

Kramer, A., 2017. The Law of Contract Damages. s.l.:Bloomsbury Publishing. Re Smith and Fawcett Ltd Ch (1942).

Swansson v Pratt (2002).

Woodgate v Davis (2002).

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