Background
Priya’s Board’s appointment as Managing Director has expired and the Board has not made a fresh appointment. However, Priya has continued to act as the company’s managing director. Priya has entered a contract beyond the scope of her previous appointment and the objects of the company. Is the failure by the Board to formally reappoint Priya has affected her Authority as a Managing Director and to bind the company?
Provisions of Corporations Act 2001
S 128
S 129
Cases to apply:
Hely-Hutchinson v Brayhead Ltd.
Equiticorp Finance Ltd v Bank of New Zealand.
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd.
Sunburst Pty Ltd v Agwater Pty Ltd.
The courts have found existence of authority where a company has failed to formally reappoint its officer and the officer has continued to exercise his/her under the previous appointment as if the contract has not expired. In Hely-Hutchinson v Brayhead Ltd the court found existence of authority where the company failed to formally reappoint a Managing Director whose contract had run out but continued to exercise the powers of a Managing director. The managing director was found to have both express and implied authority to bind the company. Equiticorp Finance Ltd v Bank of New Zealand had a similar holding. In that case, a corporation’s officer was found to have authority despite contract of appointment having expired. Priya, therefore, had both implied and express authority to bind the company provided she acted within the terms of her previous appointment and the corporation’s constitution.
Even where the officer has exceeded the authority of his/her appointment the company may still be bound provided apparent authority can be imputed. Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd. discussed circumstances under which apparent authority may be imputed into a relationship. The principal must have made a representation to a third party to the effect that the officer has the kind of authority exercised, it must be shown that reliance was placed on the representation of the principal by the third party to the third party’s detriment. The officers need not to know about the representation. In this case no representation had been made to Vineyard’s Pty Ltd and as such Priya lacked apparent authority to bind the company. However, Vineyard can rely on the assumption under ss 129 (1), (3) and (4) to assert Priya’s appointment and authority. This will depend on whether they are entitled to the assumptions based on s 128. A person is not entitled to assumptions under s 129 where they knew or suspected defects in the assumptions, s 128 (4). In Sunburst Pty Ltd v Agwater Pty Ltd. it was stated that the knowledge or suspicion must be actual and not constructive and the test for determining such knowledge or suspicion is subjective. Seedy Vineyard believed that Priya exceeded her authority and acted beyond the company’s objects. They actually knew the defects and cannot, therefore, rely on the assumptions under s 129 of the Act.
Conclusion
OW is not bound by the contract based on the grounds that Priya lacked authority to enter such a contract and Seedy Vineyards knew of the lack of authority.
Issue 1: Is OW bound by the supply contract with Seedy Vineyards?
Can the claim by Ted against the Company succeed where it is based on the articles of the company constitution and not independent contract?
Provisions of the Corporations Act 2001
S 140
Relevant cases
Eley v Positive Government Security Life Assurance Co Ltd.
Hickman v Kent or Romney Marsh Sheep-Breeders Association.
Southern Foundries Ltd v Shirlaw.
Section 140 provides statutory contracts created as a result of the company having a constitution or relying on the replaceable rules. These are statutory contracts between, among others, a shareholder and the company. A shareholder, can therefore, sue for breach of the terms of the constitution. However, this does not apply to all breaches but those that affect their shareholding. Also, a third party who is neither a shareholder nor company’s officer cannot make any claim based on the articles of the constitution. The principle that shareholder can only rely on the statutory contract to claim a breach by the company was discussed in Eley v Positive Government Security Life Assurance Co Ltd. In Eley, just like in this case scenario, a solicitor prepared a constitution for a company and included a clause appointing himself the company’s solicitor and limited his dismissal to only ground of misconduct. The solicitor was also allocated shares and became a member of the company. The appointment was terminated and the solicitor brought an action for damages. The action failed on the ground that the contract had no independent contract with company and that the relationship was that of a shareholder. Hickman v Kent or Romney Marsh Sheep-Breeders Association affirmed this position. In Hickman it was stated that where an outside right is created in the constitution and the person subsequently became a member of the company, the person cannot bring a claim on the article alleging breach of such outsider right unless it is related to shareholding. The only way a person can enforce a service claim against a company is where there exist a contract independent of the articles of the constitution as was stated in Southern Foundries Ltd v Shirlaw.
Conclusion
Ted cannot bring a claim against the company alleging breach of contract grounding his allegations on the articles of the constitution. There was no independent contract between Organic Wines Pty Ltd and Ted which was breached by the company and to be enforced by Ted. Ted, therefore, has no claim against the company.
The issue is whether this is proper exercise of power. Olive will bear the burden of proving that Miles and Karim did not act in good faith and their acts violated s 181 of the Corporations Act 2001.
Relevant provisions of Corporations Act 2001
S 181
S 1317E
Part 9.4B
Relevant cases
Australian Metropolitan Life Assurance Co Ltd v Ure.
Harlowe’s Nominee Pty Ltd v Woodise (Lakes Entrance) Oil Co NL
Under s 181 directors have a duty to channel the exercise of their duties in furthering the company’s interest. The exercise of such power must at all-time be for a proper purpose. In exercise of their duties, directors are prohibited from taking irrelevant matters into consideration but only those that are in the interest of the company and promoting its business. The courts will likely interfere with director’s exercise of power where the director considered irrelevant matters, Australian Metropolitan Life Assurance Co Ltd v Ure. The directors declined to effect transfer in the name of Ure. Ure was one of the shareholders of Metropolitan. The exercise of power by the directors was in the interest of the business. Ure’s husband had been struck off as a solicitor and the court took into consideration that he might end up in the company’s board of director’s through his wife.
Applicable Laws and Cases Related to Issue 1
The court stated that where the company took considerations relevant matters such as the insolvency and business ethics of the purchaser of the shares the directors power will not be interfered with. However, the powers will be interfered with and transfer effected where the company took irrelevant matters into consideration, such as race or sex of the shareholder. In Harlowe’s Nominee Pty Ltd v Woodise (Lakes Entrance) Oil Co NL. directors transferred a shares with the intention of defeating a takeover and acquiring capital for the company. It was held that the act was not improper but in the interest of the company.
Conclusion
The fact that Priya, through Organic Wines Pty Ltd, is one of the Seedy Vineyards Pty Ltd customers could have influenced Karim and Miles not to register the transfer. However, admitting Priya as one of the shareholders or as a member of the board of Seedy Vineyards Pty Ltd is not against the interest of the company or the business of the company or raise any issue of conflict of interest and as such Miles and Karim acted improperly and contravened s 181 of the Corporations Act 2001. Part 9.4B of the Act provides civil remedies for breach of duties. Remedies available for Olive include claim for damages, declaration of contravention under s 1317E, injunction and compensation for loss.
Did Karim and Miles owe Olive duty as a shareholder of Seedy Vineyard Pty Ltd when she was selling her shares?
Relevant cases
Hurley v B.G.H Nominees Pty. Ltd
Traditionally director’s responsibilities have been interpreted restrictively and have been limited for the benefit of the company Percival v Wright. It has been interpreted to the extent that the company is the only beneficiary while individual shareholders are left to fend for themselves. However, the courts have demonstrated that there are exceptions to that tradition as was stated in Hurley v B.G.H Nominees Pty. Ltd. In Coleman v Myers the court held that there was an exception to the tradition as held in Percival case where the director is party to the dealing. This could be where the directors are purchasing the shares from the shareholders. The directors have a duty to such shareholders. In Brunninghausen v Glavanics the court found existence of an exception where the company is closely knitted and the shareholder is relying on the director in the sale of shares. This could be in two shareholder companies. The director owes a duty to the other shareholder in such circumstance. However, without the exceptions the principle in Percival v Wright applies.
Conclusion
The sale of shares to Mile and Karim took place before the contract between Organic Wines Pty Ltd and Seedy Vineyard Pty Ltd was made. The contract was still being negotiated and in such circumstances Karim and Mile could not disclose the negotiations and any prospect of the negotiations based on the holding in Percival v Wright. There are no existing exceptions as discussed in Brunninghausen v Glavanics and Hurley v B.G.H Nominees Pty. Ltd. Karim and Miles, therefore, did not owe Olive any duty.
References
Baxt, Rober, Duties and Responsibilities of Directors and Officers (AICD, 2005) 52
Bottomley, Stephen et al, Contemporary Australian Corporate Law (Cambridge University Press, 2017)
Cassidy, Julie, Concise Corporation Law (Federation Press, 2006)
Dignam, Alan and John Lowry, Company Law (OUP Oxford, 2012)
Mugambwa, John and Harrison Amnkwah, Commercial and Business Organizations in Papua New Guinea (Routledge, 2007) 314
Nosworthy, Beth, ’Directors’ Fiduciary Obligations: Is the Shareholder an Appropriate Beneficiary?’ (2010) 24 Australian Journal of Corporate Law 282
Owens, Keith, Law for Non-Law Students (Cavendish Publishing, 2001) 467
Tomasic, Roman, Stephen Bottomley and Rob McQueen, Corporations Law in Australia (Federation Press, 2002)
Corporations Act 2001
Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199
Brunninghausen v Glavanics (1977) 2 NZLR 225
Eley v Positive Government Security Life Assurance Co Ltd (1876) 1 Ex D 88
Equiticorp Finance Ltd v Bank of New Zealand (1993) 11 ACLC 952
Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
Harlowe’s Nominee Pty Ltd v Woodise (Lakes Entrance) Oil Co NL (1968) 121 CLR 483
Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549
Hickman v Kent or Romney Marsh Sheep-Breeders Association [1915] 1 Ch 881
Howards Smith Limited v Ampol Petroleum and Others [1974] AC 821
Hurley v B.G.H Nominees Pty. Ltd (1982) 1 ACLC 387
Percival v Wright [1902] 2 Ch 421
Southern Foundries Ltd v Shirlaw [1940] AC 701
Sunburst Pty Ltd v Agwater Pty Ltd [2005] SASC 335
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