Provisions for Alteration of Company Constitution
Sammy and Huw started a business that involved subscription of a mobile application (app) that telecast entertaining and fun podcasts and interviews. The app is designed for smartphone users. They decided to market, promote and sell the app to its customers through a company of their own. They wanted to register their company as “Gosh Pty Ltd”. Huw, on behalf of the company entered into a contract on 20 April 2018 with Gracey, a popular radio host to get a supply of podcasts on a weekly a basis for their company, before the company was registered. They found out that there is already a competing business registered under the name Gosh Pty Ltd and therefore they named their company as “Oh My Pty Ltd” on 1 May 2018. On registration, the company adopted a constitution that clearly mentioned that Sammy and Huw are the two company directors, holding 45% of the shares each and the remaining 10% shares was given to Amaya, the accountant of the company. Later, on 1st July 2018 it was found out that Amaya had accepted a position with Gosh Pty Ltd, the competitor of Oh My Pty Ltd and had been encouraging Gracey to provide podcasts to Gosh Pty Ltd. Sammy and Huw immediately passed a resolution and added the clause of buying backing shares of a shareholder holding less than 11% shares at their own discretion and they stopped paying Gracey for her podcasts too.
The provisions as to the inclusion of the constitution of a company, and making necessary addition or alteration to it has been laid down under the Corporation Act (CA) 2001. It is the constitution of a company that hold its members together, and its third parties as well. Section 136 of the Corporation Act 2001, states that a company can adopt a constitution either while registering itself or after the registration, and in both the cases consent of the members or shareholders is vital. The Act under section 136(2) states that a special resolution needs to be passed for altering the constitution of the company. While section 136(3) requires such alternation to the constitution to comply with the necessary procedures laid down in the Act.
However, in Gambotto v WCP Limited the court ordered that the majority shareholders could not alter the constitution for the purpose of buying back the shares of the minority shareholders. It was opined by the court that such buying back shares of the minority shareholders would amount to oppression. Therefore, the exception to this general rule says that the company can only make such alteration to the constitution to buy back shares of the minority when such minority shareholder is competing with the company and inflicting damage to it.
Consequences of Amaya’s Actions
As for the case of Amaya, she has been dealing with the competitor company of Oh My Pty Ltd and also influencing Gracey to sell her podcasts to the competitor company. Therefore, it can be said without doubt that the decision of altering the constitution of the company to prevent Amaya from misusing her position was just and reasonable as she was damaging the company. Additionally, the two directors of Oh My Pty Ltd held 90% of the shares of the company, which makes them eligible to alter the constitution of the company without intimating Amaya who only holds 10% shares, as per Section 136(2) of the Act. Therefore, according to the provisions of CA 2001, the alternation of the constitution in this case is valid.
Section 131 of the Corporation Act 2001 states that a contract entered into with a company before it was registered needs ratification by the company within the agreed time or within a reasonable amount of time after the contract has been signed. The company is liable to comply with the terms of such contract. Derivation of benefits and profits out of such contract by both the parties equally is the motto of such contract. However, such contracts entered before registering the company must be ratified. If such contract is not ratified within the agreed time or a reasonable time then the party suffering due to such unratified contract shall be eligible to receive compensation, under section 1361(2). The court has the power to order the company or the party who has not ratifies the contract to pay the entire amount as compensation or in parts under section 131(4).
Additionally, Section 257A of the Act empowers a company to buy back its shares, however it lays down the situations when it cannot. While Section 257B states the general procedures that a company needs to follow to buy back its shares from its employees or its minority shareholders. Section 257C clearly states that the company could buy back 10% of the shares from a minority shareholder by passing a special resolution provided that it has been done following the legal provisions under this Act which require the company to issue a 14 day notice and a proper voting procedure involving all the members.
The contract between Oh My Pty Ltd and Gracey before the company was registered made it clear to pay her $4000 per month for the weekly supply of podcasts. When such contract was signed, the name of the company was Oh Gosh Pty Ltd, which was later changed to Oh My Pty Ltd. Irrespective of the change of name, the company is liable to comply with the provisions of such contract, which the company evidently failed to do.
Contracts Signed Before a Company is Registered
Thus, under section 131(2) of the CA 2001, Oh My Pty Ltd is liable to compensate Gracey for not ratifying the contract and additionally for not complying with the terms of the contract. The court may direct the company to pay wholly or partly the compensation amount to Gracey if she demands so under section 131(3) of the Act. Even though if it is established that the company ratified the contract, it can still be held liable for paying damages to Gracey as it did not act according to the terms of the contract and pay Gracey her month remuneration.
Additionally, Section 1324 of the Corporation Act states that if a person contravenes or attempts to contravene or abets to contravene the purpose of this Act, the court may issue an Injunction. On the application of the Corporation Act 2001 (Cth) s 131(4) (ASIC) or of a person whose has suffered loss or whose interest has been affected by another, the court, on being satisfied with the evidence of such loss, may grant an Injunction to stop such loss from recurring further. Gracey can opt for Injunctions under Section 1324 of the Corporation Act 2001 by virtue of which the court can stop the company from defeating Gracey of her interest, provided that she proves to the court that she has not violated the terms of her contract with Oh My Pty Ltd.
Under Corporation Act 2001, the directors are vested with various duties that they need to carry out for the interest of the company. They are liable to carry out these duties in good faith and for the best interest of the company and its shareholder. However, not just legislations but the common law too guides the directors to carry out certain duties they are obliged to do for their company.
Section 181 of the Corporation Act 2001 clearly states that the directors are supposed to carry out their duties and responsibility in good faith. They are meant to carry out such duties for the best interest of the company, laid down by Section 181(1). The directors are however liable to be penalized under section 1317E if they fail to exercise their power and meet the necessary guidelines to complete their responsibility.
The case ASIC v. Adler marks the gross violation of duty by the directors, where it was noted that the director infringed section 9, 180, 181, 182, 183 and 206A. Section 9 lays down the definition of the director’s duty and describes the essence of the importance of such responsibility. Section 180 states that the director is bound to show care and diligence towards the company while section 181 requires the director to act in good faith. Section 182 and 183 deals with provisions that refrain directors from misusing their position to gather sensitive information about the company and make wrong use of it. Section 206A talks about the financial assistance. These provisions comprising of important duties of the director was not complied with in this case. In Australian Metropolitan Life Assurance Co Ltd v Ure, it was held that even though the directors are liable to comply with the duties of the CA 2001, however, they are to exercise their power discretionally while refusing to transfer a share for a reasonable cause. The directors may refuse to transfer the shares to an insolvent person who is not eligible to enter into a contract. In Hutton v. West Cork Railway Co the court held that there are limitation to a director’s duty to spend the fund of the company for the benefit or interest of a non-shareholder. It was observed based on the financial issues that a company faces due to insolvency and the interest of the employees.
Gracey’s Defenses
Drink It Up Pty Ltd, a beverage company was running a loss in its fruit juice business but was making profits in their spring water business. To curtail the losses, the company though of opening a new company and wanted to concentrate solely on manufacturing spring water. They moved all their tangible and intangible assets from Drink It Up Pty Ltd to the new company which they named H20 Pty Ltd. It clearly showed that such decision was taken by the company to evade the creditors and escape from the complexities of financial matter that it had faced due to the loss incurred from the fruit juice business. It was the idea of the director to escape making payments to the creditors for the suffered by the company. In Bell Group Ltd v Westpac Banking Corporation it was observed that the creditors and investors risks their money while giving credits to the company and so the directors of company are at stake to act in good faith and make sure to repay the creditors. The directors must serve the proper purpose for the best interest of the company. Thus, it can be held that the decision to wound up a company to start another in order to evade making the payments to the creditors does not amount to an act done in good faith. The directors can be held liable for this mala fide act under section 1317E of the Corporation Act 2001. The directors would be liable to pay a fine up to $200000. While under section 206C of the same Act, such person may be banned from being in the position of a director.
As the general rule, a director is not vested with duties pertaining to serve an individual shareholder. It is the duty of a director to serve the shareholders as a whole. In Percival v. Wright, it was rightly observed that the directors are responsible for the company and shareholders as a whole and not towards the individual shareholders singularly. In this case, the director bought shares from a shareholder who wanted to sell his part of shares before the company was sold off, generally at a cheaper rate to the company. It was observed by the court that such action of the direction does not breach his duties under the Corporation Act, as he is only responsible for the company as a whole and not for any particular individual shareholder.
Director’s Duties Under the Corporation Act 2001
In Coleman v Myer, the general rule to the concept of director’s duty towards individual shareholders was not followed by the court. The court in this case held that the directors have certain duties towards the individual shareholders under particular circumstances. The directors are liable to serve the fiduciary duties towards the individual shareholders. It was held that the directors are liable to disclose facts pertaining to a transaction or offer of the company, which has the significance to change the perspective of the shareholder. It has been observed that the general rule to the principle would not be followed when the director has bigger responsibility to deal with concerning the individual shareholders. When such shareholder seemed to put his trust on a director pertaining to his portion of shares, the director is bound to oblige. Along with carrying out duties in good faith and for the best interest of the company, the directors are supposed to handle situations like bankruptcy of the company and stop carrying out the regular course of business in such cases. Under section 588G of the Corporation Act, the director is directed not to carry out insolvent trading while the business in going through such phase. Such infringing action of the director may attract payment of fine or damages for deceiving the creditors.
Kristofer’s breach of duty is counts on the fact whether Kristofer was obliged to serve a duty towards Dhruv, an individual shareholder. The judgment delivered in Percival v Wright can be adhered to in this given case as the facts of this case matches with it. It said that if a shareholder wishes to sell his shares to the company at a lesser price before the company is sold off, the director is not liable to let the shareholder know that the company is insolvent. Therefore, in this case, Kristofer had no liability towards Dhruv who was an individual shareholder. The exception the general principle is not applied in this case as it can only be applied in situation where the shareholder is vulnerable and puts trust on the director for a certain purpose. In this case, however, it can be noticed that Dhruv was not vulnerable and there is no aspect of trust put on the director. Therefore the exceptional rule observed in Coleman v Myers will not be followed in this case and Kristofer has no duty towards dhruv to let him know that the company is going to be insolvent.
McLaughlin, Susan. Unlocking company law. (Routledge, 2018)
Rauterberg, Gabriel, and Eric Talley. “Contracting Out of the Fiduciary Duty of Loyalty: An Empirical Analysis of Corporate Opportunity Waivers.” (2017) Columbia Law Review : 1075-1151.
ASIC v Adler [2002] NSWSC 171
Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199
Bell Group Ltd v Westpac Banking Corporation (No 9) [2008] WASC 239
Coleman v Myers [1977] 2 NZLR 225
Hutton v West Cork Railway Co (1883) 23 Ch D 654
Percival v Wright [1902] 2 Ch 401
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
