Company Law Scenario Issues - Assignment Example

Company Law Scenario Questions Student Name Tutor Course Title Date Question 1 A company in corporation law is an artificial person created by the law capable of creating contracts, acquiring property, sue and be sued. The legal obligations that are imposed once a company has been incorporated applies with no derogations. Liquidation, winding up or dissolutions occur when a company is unable to effectively service its liabilities and pay its creditors. In the case presented the main question is the place of unsecured creditors when a company goes into liquidation. An unsecured creditor is one whose debt to the company has not been secured by any security provided by the company (Ciro & Symes, 2013). In consideration of the case presented can the unsecured creditors recover from Mr Shifty or any of the fellow directors of the company? In the famous case of Salomon v A.Salomon [1897] AC 22, Aron Salomon ran a business as leather merchant and boot manufacturer as a sole trader, and in 1982 he changed the legal structure of the business to operate as a limited liability company. When the company went into liquidity Salomon stated that he ought to be paid before others since he is a secured creditor as opposed to unsecured trade creditors whose combined amounts was £11,000. The House of Lords stated that once the company is constituted it becomes a separate legal entity and a secured creditor ought to be paid. However the application of the separate legal entity test is eroded when the creation of the company is to be used as an instrument of fraud. Unsecured creditors can only recover from the individual directors where there is proof of fraudulent and unconscionable conduct as well as the directors had breached their fiduciary duties while acting on behalf of the company. The option for the unsecured creditors is to look at the capital of the company to satisfy their claims. In the case of Ding v Sylvania Waterways Ltd [1999] 17 ACLC 531 it was stated that a person who pays capital can make a pecuniary contribution to its assets as a guarantee. Further the secured creditors can recover by lifting the veil of incorporation so as to ensure that the directors take up liability. In the case of Re City Equitable Insurance Company it was reiterated that the directors would be liable if failure to act and breach of their fiduciary duty caused the financial downturn of the company. Question 2 The principle of separate legal entity implies that the company will continue to operate as long as the companies do not act as vehicles to instigate fraud. In the case of Smith, Stone and Knight v Birmingham Corporation [1939] 4 All ER 116 it involved two corporations one a subsidiary of the other operating a business of a factory building it was stated that it is fraudulent to operate a two companies for avoidance of liability and taxes. Alan can be considered to be a major shareholder of the Boardacres Pty Ltd (Boardacres) as well as the chairman whose business is to buy rural land for subdivision in hobby farms. Boardacres asks for a loan of $1.5 million from ABC finance Ltd (ABC Finance) even though it already has a large overdraft and no assets to use as security for the loan. What is the consequence of ABC financing Boardacres with a guarantee of Sailaway on mortgage over the waterfront land. Can ABC Finance enforce its right over Sailaway since the Alan forged Bill's signature in the documents. A contract in general law would not be binding if it is contrary to general rules of contract and the provisions of the Corporations Act. Where the contract is contrary to the interest of the company and it was made when the company was insolvent . In acting on behalf of the company a director must act in good faith and in the best interest of the company (Re City Equitable Assurance). Sections 128 and 129 of the Corporations Act states "that a contract would be binding unless the person has no express or implied authority to act and enter into the contract." Alan being a controlling director has no implied or express authority to act unless he was complying with the company constitution as stated under section 129. It is evident that Alan had no authority to act by mortgaging the property and as a result the contract would be void as stated in the case of Northside Developments Pty Ltd v Registrar-General (1990). In the case of Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] it was stated that if the director of the company is wrong then the company would be held liable and under vicarious liability principle the company would be liable for acts of others such as an employee or agent who commits the wrong. Alan acted in bad faith and used his position in the two companies to instigate fraudulent activities and acted in bad faith and he is personally liable for the debt and not Tom. Question 3 It was stated in the case of R v McMahon [1976] 2 ACLR 543 that the fact that two companies have common shareholders, directors and managers to carry on business at the same place should not raise a presumption that the company is already legitimate but that it must be registered. It is therefore legitimate for Company A and B to merge the companies into Company C. Company C intends to provide on-site computer training for retail business to use Company A's software. Authority is given to Shirley Company A director and Laverne a director B to take as a matter of urgency steps necessary to form Company C to secure training contracts on its behalf preincorporation contracts. This therefore gives rise to an agency relationship existing between Company C and that of company A and B. A company cannot have a contractual capacity prior to incorporation therefore no contracts cannot be executed and enforced on its behalf. In the case of Kelner v Baxter it was held that a company cannot be bound by a contract because it had no contractual capacity, it cannot ratify the contract and it cannot be sued or sue on the contract. However the agent of the company can be made liable for because of the contract as held in Kelner v Baxter. Further if the contract was made by a company that was already in existence the court might state that neither the company nor the purported agent could enforce it(Newborne v Sensolid GB Ltd). In the case presented it would be considered that Company C entered into a contract made by its agents before its formation and subject to any contrary agreement the persons who made the contract would be an agents and would be personally liable for breach of contract. The duties of a promoter in relation to a company is that they act as fiduciaries and to serve the interests of the company. Since the promoters of the Company failed to register the company then the promoters would be liable as stated in the case Erlanger v Sombrero Phosphate Co(1878). Rescission as a remedy would be available if the company has not affirmed the contract, the parties can be restored to their original position and that there has been an undue delay. However there was an express agreement in the contract that if it fails to register within two months then Company the contract would be null and void. Question 4 In company law shares must be transferable but it is natural for a private company to restrict the transfer of shares. Roseneath Pty Ltd (Roseneath) constitution expressly state that "The right of the members to transfer shares in the Company is restricted in that directors may at any time in their absolute discretion decline to register any transfer of shares." the main issue is whether Stephen's transfer of shares to Julia worth 2000 is legitimate under Roseneath constitution? The deed of transfer states that Julia pays $4000 to Stephen and a duly executed and stamped transfer is forwarded to Roseneath with a request for registration. The deed executed can be considered as a legal documentation giving effect to the transfer a requirement of Chapter six of the Corporations Act. It is material to examine whether by virtue of transferring the shares the voting powers of another person in the entity increases or decreases. Section 606 of the Corporations Act states that a person must not acquire a relevant interest in issued voting shares in a controlled entity from 20% or below to more than 20% and from a starting point that is above 20% and below 90%. The failure of the company providing reasons for denial of registration must be treated with contempt. The effect of a transfer of shares implies that the transferee becomes the beneficiary until the registration because he asserts a legal title over the shares (Musselwhite v C.H. Musselwhite & Sons Ltd (1962) 2 WLR 3471). In the event of refusal by the directors then Julia has the right to rescind the contract and entitled to the purchase money or any amount advanced for the shares(Saharay 2008). The internal rules of a company as stated under sections 1072F and 1072G gives the directors a right to refuse to register a transfer of shares. The refusal must be exercised in good faith as stated in Re Smith & Fawcett Ltd [1942]. A remedy available under section 1071F "anyone refused registration may apply to the court and if it is found that the directors have refused or failed to register the transfer without a just cause the court can issue orders as it deems fit "Waters v Winmardun (1990) List of References Ciro, T and Symes, Corporations Law:In Principle,9th edn, Thomson Reuters, Sydney, 2013. Roman Tomasic, Stephen Bottomeley & Rob McQueen, Corporation Law in Australia. The Federation Press, Sydney, 2002 Saharay , H.K. Company Law (Textbook) 5th ed Universal Law Publishing, 2008. Read More