Part A
Issue
The issue in this case is to analyze the validity of the letter of comfort. The case also analyzes the presence of Intention to create a Legal relationship.
Rule
In the case of Edwards v Skyways Ltd [1964] 1 All ER 494 an airline company made few of its pilots redundant as it was in financial difficulties. There was a promise made to the pilots that they would be provided with ex gratia payment. This had been considered through a resolution between the board of the company as well as agreement between association representatives and company representatives (Fitzpatrick et al. 2017). The plaintiff left the company and made claim for the payments. The company argued that even where there was a consideration the contract cannot be enforced at law as it is a mere moral contract. In this case the issue before the court was to considered whether there was intention of creating a legal obligation on the part of the airlines company. The court in this case ruled that in case an agreement has been reached in the course of business affair and not in social or domestic context it is presumed that the contractual parties have intended to create legal relations. The party who is rebutting the presumption has to show that there was a mere moral obligation and not an enforceable contract. In this case the circumstances inferred that there was intention on the part of the company which could not be rebutted.
In the case of Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5 there was a tenancy agreement between the plaintiff Mardon and the defendant Esso Petroleum in relation to a petrol station which the defendant owned. There was an expert evaluation done in relation to the sale estimate of the petrol pump which was based on inaccurate information and the figures were inflated. The value of the agreement had been calculated relying on the inflated figures of sale. Thus it became impossible on the part of the plaintiff to operate profitably the pump. The issue in this case was that whether the plaintiff can make a claim in relation to misrepresentation in the light of the fact that the figures were an estimate rather than a statement of fact. In this case it had been ruled by the court that the plaintiff cannot get out of the contract by relying on misrepresentation as the inflated figure of sales were mere estimates rather than a statement of fact (McKendrick 2014).
Application
There was an agreement between the plaintiff bank and the defendant to provide a loan facility extending up to 10m to the wholly owned subsidiary of the defendant. The subsidiary had traded in Tin with respect to the London Metal Exchange. In relation to the arrangements two letter of comforts had been furnished by the defendant to the plaintiff. In each of the letters it had been provided that “It is our policy to ensure that the business of [M] is at all times in a position to meet its liabilities to you under the [loan facility] arrangements” in para 3. The market had collapsed and the plaintiff were owed by the subsidiary the whole amount of money under the loan. The subsidiary was subjected to liquidation and the plaintiff made a claim against the holding company. In the trial case it was held by the judges that the defendants were liable to compensate the plaintiff due to the letter of comfort provided by them (Knapp, Crystal and Prince 2016). However the decision was overturned in the appeal. This is because a letter of comfort provided by the parent company to a lender containing the clause that the policy of the parent company in relation to the subsidiary being in the position to meet its liability at all times in relation to the loan which is to be provided did not have any form of contractual effect. It is only a statement which presented the facts in relation to the intentions of the parent company and did not result in a contractual promise with respect to the future conduct of the parent company. In addition with respect to the facts the 3rd para of the letter of comfort is to be considered as a statement regarding present facts and not at all a promise regarding future conduct and in the situation in which the letter had been provided did not have any kind of intention rather than a factual representation which gives rise to mere moral responsibility imposed on the defendants to pay the debts incurred by the subsidiary. The court considered the rules on Edwards v Skyways Ltd where it had been mentioned by the court that in case an agreement has been reached in the course of business affair and not in social or domestic context it is presumed that the contractual parties have intended to create legal relations. The party who is rebutting the presumption has to show that there was a mere moral obligation and not an enforceable contract. The defendants in the present case were able to make the rebuttal there was a mere moral obligation and not an enforceable contract. In addition it was held by the court that there was no misrepresentation on the part of the defendant with respect to the letter of comfort. This was asserted by relying upon the case of Esso Petroleum Co Ltd v Mardon where it was ruled that where there is only an estimate made by the defendant and not a statement of fact there would be any form of misrepresentation on the part of the defendant. Thus the court ruled in favour of the defendants in the present case.
Part B
Conclusion
A letter of comfort provided by the parent company to a lender containing the clause that the policy of the parent company in relation to the subsidiary being in the position to meet its liability at all times in relation to the loan which is to be provided did not have any form of contractual effect.
Issue
The issue in this case is whether there has been use of confidential information on the part of the director of the company for the purpose of making personal gain and contravening the provisions of Corporations Act 2001 (Cth).
Rule
Section 183 articulated in the CA 2001 provides for one of the statutory duties owed by the directors to the corporation which has provided them with the power to manage its operations. The section expresses that any person who acquires information because of being or they had been an officer or director or employee of a corporation should never use the information improperly in the pursuit of gaining advantage for themselves or any third party or subject the corporation on context to a disadvantage or loss (Talbot 2015).
This section is a regulatory offence as provided for in the legislation. On a regular basis it is usual for the directors of an organization to be aware of or gain knowledge about data which may be not made available publically and is kept confidential even form the shareholders of the company. At common law the directors are not provided ability utilise such information to for pursuit of personal benefits and interest. It is not a matter of concern for the court that whether the actions of the directors have caused any harm to the company or whether it has taken any opportunity from the company through which it has gained. It is merely required that the directors have used the information in way which is in relation to personal benefits. This rule had been discussed by the courts in the case of Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134. However, this rule cannot be considered as absolute and is subjected to a few exceptions. It had been realized by the parliament that more than often common law has been ignored. The temptation is relation to realizing an improper way of making profit was very much (Milman 2017).
Section 183 has another purpose which is equally important. The section attempts to create a rule regarding a conduct which is mandatory for proper behaviour of commercial life in order to ensure that people would be provided with the required confidence that the market is in safe hands (Fitzpatrick et al. 2017).
The breach of s 183 of the CA is a civil penalty provision under the rules of s 1317E of the CA. When the court has come to the conclusion that a person has violated the provisions of section 183 the declaration is provided under section 1317E. after this and order is made by the court under Section 131 7G that the directors are required to pay a pecuniary penalty to the Commonwealth if the court has come to the conclusion that the contravention made by the director is serious or hampers the ability of the company to pay its creditors or hampers the interests of the company and its members. The court may additionally make an order under section 1317H under which the directors are required to compensate the corporation for any damages which have been resulted out of the contravention made by the directors. The court may also provided disqualification order in relation to the directors under which they would not be allowed to manage Corporation for specific period under section 206C.
Rule
Application
The defendant was a non executive director in the company Telstra Corporation Limited. He had himself established the corporation with the name of Creative Technology investment Pty Limited. In this company the sole director and shareholder was Mr Lay. In this case it has been found by the court that the dependent director had entered into three transactions during 2000 as a result of obtaining confidential information with respect to his capacity as a non executive director of Telstra through which he got the knowledge that the transactions are going to be profitable. Only because the dependent director had got the knowledge that the share price of sausage is going to rise he provided instructions to Mr Lay to purchase shares in the company. After the Purchase took place Telstra announced about the merger with sausage. Due to the merger the share price of sausage substantially became high and the company of the defendant director was able to make unrealized profit amounting to $140,000. In another transaction the defendant director has got the knowledge that because his company is going to sell off their shares in another company he sold the shares of the other company to avoid loss. This knowledge could have only gained by him as a non executive director of Telstra. In relation to the third transaction there was an acquisition of interest in a company keycorp limited by Telstra. This knowledge was attained by the defendant directors and instructed Mr Lake to purchase shares in keycrops that they are able to make a profit. the three transaction theory signify that the defendant directed has used the information gained by him through Telstar as he was the director and this information was also not available to the public for personal benefit. This means that the provision of this section has been violated by the defendant director and he would be subjected to the civil penalty provisions. In this situation the court had to determine that whether the breach which has been made by the defendant directors in this situation is to be considered as a serious breach or not so that the pecuniary penalties could be imposed. The court also had to determine whether the director is to be subjected to ban from managing the corporation. In this case the penalty which had been proposed by the ASIC was $130000 for every contravention. However the court held that the maximum penalty which can be imposed is of $200000. The director had been suspended for a period of 5 years from managing corporations in Australia.
Conclusion
There has been use of confidential information on the part of the director of the company for the purpose of making personal gain.
References
Fitzpatrick et al. 2017 Business and Corporations Law 3rd edition
Milman, D., 2017. A review of developments in partnership law 2017. Sweet and Maxwell’s Company Law Newsletter, (399), pp.1-5.
Talbot, L., 2015. Critical company law. Routledge.
Fitzpatrick J, Symes C, Veljanovski A & Parker D, Business and Corporations Law 3rd ed. (2017), LexisNexis Butterworths Australia.
McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).
Knapp, C.L., Crystal, N.M. and Prince, H.G., 2016. Problems in Contract Law: cases and materials. Wolters Kluwer Law & Business.
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