The Breach of Contract or Agreement - Essay Example

Company Law - 4 Steps Essay Table of Contents Table of Contents 2 Question 1 3 Step Area of Law/Legal Issue(s) 3 Step 2: The Relevant Law 3Step 3: Apply the Law to the Problem 4 Conclusion 5 Question 1.2 6 Step1: Area of Law/Legal Issue(s) 6 Step 2: The Relevant Law 6 Step: 3 Apply the Law to the Problem 7 Conclusion 8 References 9 Bibliography 11 Question 1.1 Step 1: Area of Law/Legal Issue(s) The case reference of Leaping Lizard Coffee Emporium Pty Ltd deals with the breach of contract or agreement among directors under the Corporations Act 2001, which fundamentally applies to companies registered after 1st July 1998 and were no longer requisite implying on Articles of Association (AoA) or Memorandum of Association (MoA) (Tomasic, Bottomley and McQueen, 2002). The key legal issue identified is in the case scenario concentrates on whether the actions of Anna and Susanna were focused on yielding personal benefits or the company’s interest. Step 2: The Relevant Law A company’s management is generally administered by the provisions of Corporations Law under Section 134 which applies to companies as ‘replaceable laws’ by constitution. However, it is the sole discretion of the company’s management to decide on the number of replaceable laws to be applied which are mentioned in the Corporations Act 2001. Furthermore, Section 140(1)(b) of the Corporations Act 2001 states that replaceable and constitution laws are obliged to a contract engaging the company and its directors under which every director agrees to adhere to the rules and constitutions mentioned as per the organisational interests (PricewaterhouseCoopers, 2011). In relation to Section 198 of Corporations Act 2001 (Cth) the directors of the companies possess the authority to exercise all the discretionary powers except for those which require additional approvals in accordance to the constitution. With reference to Section 198C, the directors of a company may assign a managing director and bestow the personnel with responsibilities according to their convenience and requirements. Furthermore, the management also enjoys the authority to cancel or reassign powers of the managing director, who have been assigned with the discretion of all the directors (Tomasic, Bottomley and McQueen, 2002). Under the act, if a company or its entitled directors aim to appoint a managing director it must ensure that the formalities comply with the Corporations Act 2001 as mentioned under Section 198C. The law specifies that the directors of the company should adhere to certain rules that have been decided and assigned to the managing director, irrespective of their discretionary powers. Breaching of contracts or agreements within the directors or shareholders of a company may lead to violation of the law as stated in Section 180(1) by the Corporate Law Reform Act 1992. A similar situation have been identified in the case of Vines v ASIC (2007) 73 NSWLR 451, where the director breached the common law or contract, and consequentially, the court agreed that the judgement could amount to sue the director for the damages caused by negligence of law (Pitt and Luxton, 2011). However, statutory defences are available under Sections 180(3) of the Business Judgement Rule which states that breach of contract can be defended if the director can prove that the decision and action taken was in relevant to the business operations of the corporation (Nadeau, 2006). Step 3: Apply the Law to the Problem Leaping Lizard Coffee Emporium Pty Ltd specialises in coffee and other coffee-related accessories. It operates as a private company formed by Joan, Anna, Prafula and Susanna who were further designated as the directors of the company with equal share capital. In addition, the company consists of three members each owning 1000 ordinary class shares. The company has been registered under the Corporations Act 2001 in the year 2012 and adopted replaceable rules under Sections 6, 33A to 39, 198A and 198C. Besides, the company has appointed a managing director whose approval and signature is required for contracts above AUS $20,000. However, two directors Anna and Susanna, being impressed with the price and range of products decided to take benefits of the special offers and purchase a few items including machineries from the 2012 Melbourne International Coffee Expo. The cost of the products amounted to AUS $25,000. They paid an advance of AUS $2,500 with the commitment of paying the balance within 30 days. Thus, it can be noted that the two directors breached the Duty of Care and Diligence mentioned in Section 180(1) which compelled them to take approvals from the managing director prior to signing the contract. In relevance to the law, the directors violated the common rules agreed between the other directors. Since, the judgement was for the company’s best interests, they could have informed the other directors before finalising on the deal as stated in Section 180(2). Moreover, the directors could have informed the managing director about the benefits the company would gain while asking for approval. Hence, the company could have averted the consequences of breaching the contract and hence save the company from causing losses. This could have also protected the directors from being sued owing to the possibilities of breaching a contract or common law as decided by the board of directors. Conclusion In relevance to the information provided in relation to Leaping Lizard Coffee Emporium, it can be advised that the other directors Joan and Prafula can take the decisions based on the business judgement rule 180(3), as the contract was made by Anna and Susanna in good faith and for a fair purpose. Question 1.2 Step1: Area of Law/Legal Issue(s) The law related to the case of Leaping Lizard Coffee Emporium Pty Ltd, deals with breach of company constitution/replaceable rules owing to the fairness of issuing shares to a newly appointed managing director without the consent of the external shareholders. Hence, the key legal issue identified in this case is whether the directors of the company violated the constitution law for the best organisational interests which might be hampering the rights of the shareholders, i.e. the three member (other than the four directors) of the company. Step 2: The Relevant Law The replaceable rule under section 135 of Corporations Act 2001 (Cth), deals with the controlling of shares and paying dividends. Stating precisely, the section 254D deliberates that existing shareholders can pre-empt the issue of shares in a private company. Besides, before issuing shares, the directors of a private company are compelled to offer the existing shareholders for buying the shares (Caledon Resources Plc., n.d.). Hence, if directors of a private company decide to issue certain shares, they ought to be conscious that the number of shares being offered to each shareholder is in proportion to the numbers they are already held. Furthermore, the directors should offer a written statement to the shareholders mentioning the terms and conditions of issuing shares. It should also include the time period until which the offer will remain valid and accessible noting that if the shareholders do not buy the shares within the offered time, the directors will have the full right to reissue the share to external members. A resolution should be passed at a general meeting that authorises the directors to issue shares to external members if not procured by existing shareholders (Duffy, 2008). With reference to Section 198A, the directors are entitled to practice almost all the discretionary powers of the company with exemption to those Acts mentioned in the company’s constitution. However, the Acts can be exercised in a general meeting where all the shareholders are offered to be present in order to be informed about the changes in replaceable laws by the company. If a company disregards the law, the directors are liable for violating the constitution law which was agreed during the formation of the company. Contextually, shares are issued for fulfilling two purposes, i.e. proper causes and improper causes. Issuing shares for raising the capital without informing the existing shareholders is referred as a proper cause; however issuing shares for maintaining control over the rights of the shareholders is considered as an improper purpose. These features can be apparently witnessed with reference to the case of Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, the company issued shares without the consent of existing shareholders for manipulating the voting rights and control over the company (Cassidy, 2006, 254). Step: 3 Apply the Law to the Problem Leaping Lizard Coffee Emporium Pty Ltd has been planning to increase its business to Malaysia. Therefore, the existing directors of the company decided to appoint Arrifin, a local individual, as an additional director of the company. The decision followed because of the local knowledge and expertise possessed by Arrifin. However, the directors unanimously decided to issue 1000 ordinary shares to Arrifin for being the new director. The directors also modified the company’s constitution in order to remove the replaceable rule which restricted the directors to issue shares to external members without offering the same to the existing shareholders. Their decision violated the protection rights of the shareholders mentioned under Section 254D. The decisions can be anticipated to have been evolved for improper purposes in order to minimise the rights of the shareholders. Therefore, the company is liable to the existing shareholders for violating the laws and breaching the contract. Conclusion The external shareholders of the company have certain remedies to protect their rights which have been agreed in the company’s constitutional contract. Civil remedies for breaching a contract mentioned in the company’s constitute include civil penalties, such as pecuniary penalty, fines in terms of compensations and disqualifications. Furthermore, it can attract criminal offences if it is found that the breach has been conducted intentionally disregarding the interests of the shareholders. Thus, the most desired remedy for the shareholders could be the equitable remedy of specific performance which can also be termed as injunction. This remedy allows the shareholders to appeal to the courts for directing the company to perform actions which are specifically mentioned in the contract. It can further demand for the damages that have been caused to the shareholders due to the actions of the directors. References Bowley Kerr Nadeau, ‘Directors & Officers Duties and Liabilities’ (2006) The Grey Book Corporate Compliance Series. Caledon Resources Plc., Replaceable Rules Outline (No Date) Corporations Act 2001 (Cth). Michael J. Duffy, ‘Shareholders Agreements and Shareholders Remedies Contract Versus Statute?’ (2008) Bond Law Review 20(2). Julie A. Cassidy, Concise Corporations Law (Federation Press, Russia, 2006). PricewaterhouseCoopers, A Guide To Directors’ Duties And Responsibilities For Non-Listed Public Companies And Proprietary Companies In Australia (2011) . Roman Tomasic, Stephen Bottomley and Rob McQueen. Corporations Law in Australia (Federation Press, 2002). Simon Pitt and Dean Luxton, ‘Directors’ Duties’ (2011) Green’s List Breakfast Seminar Series. Bibliography Peter Surgeon, ‘Corporate Governance and Directors’ Duties In Australia’ (2003) Dibbs Barker Gosling Lawyers. Juliette Overland, ‘There Was Movement At The Station For The Word Had Passed Around: How Does A Company Possess Inside Information Under Australian Insider Trading Laws?’ (2006) Macquarie Journal of Business Law 3. Read More