Overview of the Issues
- The issue which identified in the situation is that whether the issue of class “B” shares is allowed by the Corporation Act2001 (Cth) (CA)
- The issue is also to identify whether any actions can be taken by Kevin in relation to preventing issue
An organization is allowed to vary the rights of the shareholders in relation to a share if they comply with the provisions of the CA.
There are specific circumstances in which the CA would consider that the class rights have been varied. These circumstances also include the issue of new shares through a new class of share. As provided under section 246C (5) an issue is considered as a variation of class right. This would be a variation, in case the rights which have been provided to the new class of shares are not the same as rights available on shares which have been issued. In addition such rights are contained in the constitution of the company or a notice sent to the ASIC.
As provided under section 246B(2), where there is no constitution for a company which provides for rules to vary or cancel class rights, the variation or cancellation of class rights can be done through a special resolution with a minimum of 75% of votes from the affected class.
Under the provisions of section 246D a person has the right to set aside the variation or cancellation of class rights. When the share of the people is more than 10% they can apply for setting aside the variation or cancellation. The court would do so if it is satisfied that the applicant would be unfairly prejudiced by the variation. There are other ways also such as injunction under s1324 or 246B if the company has a constitution. The member can also claim a breach of statutory contract to set aside a variation or cancellation of class right if it is not according to the constitution.
In case the member is not able to prevent the variation of class right it would take effect one month under section 246D (3) (a).
In the present situation James and Vicky have planned to issue new class “B” shares to the employees. These shares are subjected to have priority dividends rights which are not present in the existing class “A” shares. However they would not be provided with any voting rights. This issue of shares would be considered as a variation or cancellation of class rights under the provisions of section 246C (5). This is because class B shares are not the same as rights available on shares which have been issued which are Class “A” shares in this situation.
Legal Provisions on Share Variation
In addition, it is stated that the company does not have a constitution. Thus there is no specific procedure to set out for variation or cancellation of class right. Here the issue of new shares can be carried out done through a special resolution with a minimum of 75% of votes from the affected class.
The affected share class is class A shares. There are a total of 1000 class A shares (after Kevin converts his rights into 100 shares). The 75% of the Class A shares is 750 and Vicky and James have 900 shares. So they have the right to issue the shares under section 246B(2).
In relation to the second issue it has been provided under section 246D a person has the right to set aside the variation or cancellation of class rights. When the share of the people is at least 10% they can apply for setting aside the variation or cancellation. The court would do so if it is satisfied that the applicant would be unfairly prejudiced by the variation. In the present situation the share of Kevin is 10%. Thus in the given situation Kevin has the right to challenge the decision of Vicky and James to issue class “B” shares to the employees in the court. The court, if it finds that the rights of Kevin are subjected to being unfairly prejudiced may set aside the cancelation or variation of class rights, which means that class “B” shares will not be issued.
Conclusion
- James and Vicky have the right to issue class “B” shares under section 246B (2).
- Kevin can make an application to the court under section 246D for setting aside the variation of class rights.
The issue is to identify whether the lease and sale of assets deal indulged into be the company is valid. The issue is also to identify the possible remedies which the ASIC or Rosta can take against PPW, James and Vicky.
Under section 126 of the CA it has been provided that any person who has expressed or implied authority to Act on behalf of the company is provided power to discharge, ratify, make or vary a contract for the company. Under section 198A it is provided that the directors have the authority to carry out all powers provided to the company on its behalf unless restricted by the CA or the constitution. However section 126 states that the section does not have effect on the way in which a contract is to be ratified.
Under section 127 of the CA, it has been provided that for executing a document with or without a common seal a company requires signature of either 2 directors, or a CS and a director. In the case of Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd it had been stated by the court that only of the document is witnessed under the rules of section 127 can the other party rely on the assumptions under section 129.
Application of the Share Variation Rules
There are certain situations where the court may lift the corporate veil of a company. This can take place in the time of fraud, avoiding legal obligations and insolvent trading. In the case of Creasey v Breachwood Motors Ltd, the court stated lifted the corporate veil from a company which had been formed to avoid legal obligations. The same had been done by the court in the case of Gilford Motor Co Ltd v Horne. In the former case the plaintiff had sued a company Welwyn ltd to claim its asset. The company transferred all its assets to Breach Motors. The court held in this case that the plaintiff can directly sue Breach Motor to recover the assets.
In addition the corporate veil can be lifted when the directors have indulged in insolvent trading under section 588G. Under this section it has been provided that the directors should not indulge in trading when they have the knowledge that the company is insolvent or likely to become insolvent. They can be held liable personally for insolvent trading.
In the first situation it has been provided that, James had entered into a lease to purchase office equipments for a price of $10000 per year. In the given situation he has not executed the contract under provisions of section 127 and it has not been signed by two directors of the company. The contract would not be binding on the company as although under section 198A and 126(1) James has the right to bind the company to the contract, the contract has not been executed in a proper manner under section 127(1) or 127 (2).
In the same way, Vicky has opted to sell the assets of the company to PPW. In this situation also he has not executed the contract under provisions of section 127 and it has not been signed by two directors of the company. The contract would not be binding on the company as although under section 198A and 126(1) Vicky has the right to bind the company to the contract, the contract has not been executed in a proper manner under section 127(1) or 127 (2).
It is clear through the facts of the case study that Rosta has become insolvent. A company is said to be insolvent under section 92A of the CA if the assets of the company are less than the liabilities of the company. In order to avoid the creditors form claiming the remaining assets of the company, all assets have been sold to a newly formed company PPW. In the given situation it can be stated that the court will lift the corporate veil of the newly formed company. This is because the company has been formed to avoid a legal obligation which is to restrict the creditors of Rosta from claiming its assets. The facts in the present situation are similar to the facts of the case of Creasey v Breachwood Motors Ltd, where the court stated lifted the corporate veil from a company which had been formed to avoid legal obligations. In this case also the plaintiff had sued a company Welwyn ltd to claim its asset. The company transferred all its assets to Breach Motors. The court held in this case that the plaintiff can directly sue Breach Motor to recover the assets.
Legal Provisions on Execution of Contracts under Section 127
The ASIC has been provided the power to bring an action against a company for the breach of CA provisions. Under the CA a company cannot be formed to avoid a legal obligation. Thus in this situation as a liquidator has been appointed in relation to Rosta both the ASIC and Rosta can make a claim against PPW. As the plaintiff had been successful in the case of Creasey v Breachwood Motors Ltd and Gilford Motor Co Ltd v Horne having similar facts, ASIC and Rosta would also likely to succeed in the legal claim. In addition ASIC and Rosta can make a claim under section 588G(3) which makes a director personally liable if they indulge in trading when they have the knowledge that the company is insolvent or likely to become insolvent.
Conclusion
For the above discussion it can be concluded that the contract got into by James and Vicky for the lease and sale respectively would not be binding on the company as although under section 198A and 126(1) they had the right to bind the company to the contract, the contract has not been executed in a proper manner under section 127(1) or 127 (2).
In addition ASIC and Rosta can file a claim against PPW and are very likely to be successful.
The issue in this situation is to identify the steps which could have be taken by Kevin to prevent the registration of PPW and the transfer of assets from Rosta to PPW.
Under section 232 of the CA a court has the right to make orders under section 233 of the court is satisfied that the way in which the affairs of a company are being managed, any actual or proposed omission or act on behalf of the company, a proposed resolution or resolution of the members or class of members of the company, is either, not in the interest of the members of the company as a whole or is to be considered as unfairly discriminatory, oppressive or prejudicial against a specific member or members of the company whether in the same capacity or any other capacity. Any person to who shares have been transferred through the operation of law would be considered as a member of the company.
Under section 233 of the CA the court has the right to make orders which it finds appropriate under the section. These orders include, the orders of winding up of the company, modification or repeal of constitution, restraining a person from indulging into a conduct or requiring a person to do an act.
In relation to the laws which have been discussed above, it can be stated that Kevin could have filed a derivate action claim against the actions of James and Vicky. This is because Kevin is a minority shareholder of the company as the 10% shares have been provided to him under the operation of law. In addition he could have made a claim before the court that the way in which the affairs of Rosta are being managed, with respect to the sale of its assets to the newly formed company PPW, as Rosta has become insolvent, is either, not in the interest of the members of the company as a whole or is to be considered as unfairly discriminatory, oppressive or prejudicial against a specific member or members of the company whether in the same capacity or any other capacity. Here the interest of the members of the company is being affected.
He could have obtained an order form the court under which the court would have directed James and Vicky from indulging into the conduct of selling the assets to PPW.
Conclusion
Kevin could have filed a derivate action claim under section 232.
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