Company Entering Contracts - Assignment Example

PART A Q1 Company entering contracts The power of a company to contract is an incident of its being endowed with a legal personality at the moment of its registration. Section 119 of the Corporations Act 2001 (Cth) states “A company comes into existence as a body corporate at the beginning of the day on which it is registered” whilst s. 124 states “A company has the legal capacity and powers of an individual both in and outside this jurisdiction. A company also has all the powers of a body corporate.” As an individual, the company can be dealt with or deal as a fully capacitated person, which means that it can sue and be sued as well as enter into contracts with other persons or entities. Although a company is considered a legal person, it remains an abstract entity and when it enters into a contract it is necessarily done by real persons on behalf of the company. There are 2 sways with which a company can enter into a contract and these are set out under §126 and 127, which are also referred to as the indirect and direct methods. In the direct method, a company can enter into a contract by attaching a common seal, which serves as the company’s signature together with the signatures of 2 directors or one director and the company secretary. Since the use of the common seal is not mandatory, legal documents can be executed with only the signatures of one director and the company secretary. The indirect method, however, is the more usual practice and contracts can be entered by any person on behalf of a company if such a person is acting as its agent. There are three types of agents that usually enter into contracts on behalf of a company: an agent with actual authority and this refers to persons who are given the authority to act on behalf of the company by the corporate constitution or by the statutes or through a ‘power of attorney’; an agent with apparent authority, which refers to one who has no express or implied authority, but is being held out as an agent of the company through indirect means such as corporate or business cards carried by one whose position can be presumed by any reasonable person to endowed with authority. Lastly, an agent with no authority at all, but whose act in entering into a contract with another is ratified by the company after the fact (Adams 2005, pp. 32-33). Q2 Members’ decision-making In Foss v Harbottle [1843] 67 ER 189, the Court ruled that when an injury is committed against the company it is only the company that can bring against an action to prosecute that wrong. This is an application of the proper plaintiff rule. Another dictum that the Court laid down was that when a wrong is committed by any of the company directors, which can be made subject to ratification by a simple majority in a general meeting, the court cannot substitute its decision to that of the majority. This is the so-called internal management rule and is based on the principle of majority rules. The courts have, however, admitted certain exceptions to the majority rules at common law. One of these exceptions and the most commonly used is the equitable fraud on the minority principle. In this exception, a shareholder/ is granted the right to bring an action on behalf of the company if the action of the controllers or the majority shareholders or the directors is fraudulent and brought to benefit themselves at the expense of the company. It is important for this exception to apply that the company has suffered some loss and the culprit/s was able to gain from his act (Pavlides v Jensen [1956] 2 All ER 518). It is also a requirement that the shareholder that is bringing the action is himself blameless of the wrongdoing as was held in Nurcombe v Nurcombe [1985] 1 All ER 65 (Tomasic et al pp. 404-406). In 1995, the High Court decided a case that involved an action by a minority shareholder against a majority shareholder when the latter altered the corporate Constitution to justify the expropriation of minority shares. This was the Gambotto v WCP Ltd (1995) 13 ACLC 342. In this case, the majority shareholder who owned 99.7% of the company’s shares proposed and approved the alteration of its constitution so that it would be allowed to expropriate the remaining .3% of the company shares held by three shareholders. The HC held that alteration was invalid because it resulted in a situation where conflict of interest and advantages arise. Thus, the Gambotto case has established a new test to determine the validity of alterations of a corporate constitution and rejected the bona fide test in Allen v Gold Reefs of West Africa [1900] 1 Ch 656. In Allen, the Court held that an act of the majority shareholders or directors are valid if it for the bona fide good of the corporation, but in Gambotto, the Court held that the test should be that any alteration to a corporate Constitution is valid if is not ultra vires in the sense that it does not go beyond the powers and purpose being contemplated by the constitution or that it does not oppress the minority shareholders. Q3 Periodic disclosure Disclosure and access of certain information to shareholders are required in certain cases and these disclosures may either be periodic, special occasion reporting and continuous reporting. Under Chapter 2M of the Corporation Act 2001 (Cth) on Financial Report and Audit, a company, registered scheme and a disclosing entity are required to make certain discourses to its members. The aforesaid are required to disclose, on an annual basis, the financial report for the year, the director’s report for the year and the auditor’s report on the financial report, and a concise report for a financial year that includes the following: a concise financial report for the financial year made under standard accounting; the director’s financial report for the financial year; a statement by the auditor that the financial report has been audited and that it complies with accounting standards, and; a statement that such a report is a concise report and the full reports will be made available to members without costs and will be sent to each member through the post. There are also provisions of the law that require the reporting to be made continuous. Disclosing entities or those entities offering ED securities are also required to execute half-year financial reports and provide access to them to their members. Q4 Separate legal personality and lifting the veil of incorporation Under the Corporations Act 2001, an entity becomes a separate legal personality at the moment of its registration (s 119). The implication of possessing a separate legal personality is that a corporation is a legal entity on its own that is separate and distinct from its directors, officers and shareholders. Thus, by fiction of law, a corporation operates like it is a person by owning properties, going to court to sue and enter into contracts, amongst others. And like any other person, a corporation can also be sued and liability can attach to it. For shareholders, the greatest advantage of this conferment of separate legal personality to corporations is that in the event liability attaches to them, only the assets of the corporation as a separate entity can be ran after by its creditors or legal opponents and not those of the shareholders. The precedent case for this principle is the old case of Salomon v Salomon [1997] AC 22 where the Court upheld the separation of a company from its shareholders. In this case, the liquidator wanted to declare the sale of debentures of the company’s principal creditor who is also the majority shareholder to a third party so that the proceeds of the assets of the company can be applied to its creditors rather than to the secured creditor, but the Court upheld the separation and distinction between the majority shareholder and the company. There is, however, an exception to the principle of separate and distinct personality and this is the so-called lifting the veil of incorporation. This principle acknowledges that there are instances when a company is being used for the purpose of perpetuating or concealing illegal activities by its directors or officers. Lifting the veil of incorporation is the act of the courts in disregarding the principle of separate and distinct personality of a company in the following cases: insolvent trading under s. 588G of the CA 2001as exemplified in the Morley v Statewide Tobacco Services [1990] 8 ACLC 827 where it was declared that a passive and negligent director is personally liable for insolvent trading; offences under tax law; in case of sham companies as exemplified by Gilford Motors Ltd v Horne [1933] Ch 935; in the case of closely connected agency or group of companies as shown in Walker v Wimborne [1976] HCA; when a company is used to perpetuate fraud as was held in Green v Bestobell Companies [1882] WAR 1, and; in times of war as what happened in the case of Daimler v Continental Tyre and Rubber Co [1916] 2 AC 307. PART B Q1 Members’ remedies The law provides remedies to members, which they can resort in the event to defend their rights and protect the company. However, minority members enjoy additional remedies and rights because of the law see them as more vulnerable than the majority members. The first right that all members share is the right to ratify or not acts that are considered ultra vires or are beyond the powers granted to directors or officers by the corporation’s constitution. Secondly, an individual shareholder has a right to enforce his personal rights as a shareholder and to protect that right from being violated. This remedy is not contrary to the principle laid down in Foss v Harbottle because the latter case was concerned with wrongs done to a company while the shareholder’s individual right concerns wrongs done to his personal rights. As earlier discussed, a right available to minority shareholders is the equitable fraud on minority remedy where minority shareholders could bring an action when a fraudulent act has been committed by majority shareholders or directors of the company constituting an exception therefore to the Foss v Harbottle dictum. A third remedy that can be resorted to by the shareholders is the oppression remedy under §223 of the CA 2001. Under this provision, a shareholder or an ex-shareholder can make an application to the court in cases where the an act or resolution of majority shareholders or directors are contrary to the interest of the shareholders as a whole or when they are oppressive or discriminatory to any of its members. In such a case, the court can issue an order that can be any of the following, amongst others: for the company to wind up its affairs; the repeal or alteration of the company constitution; the regulation of the company’s future conducts; the purchase of shares of any of the members; the cessation of the present proceedings of the company, and; the appointment of a receiver (s. 233 CA2001). The statutory derivative action is another remedy open to shareholders (s. 236). In this remedy, a shareholder can bring an action in court on behalf of the company. However, this remedy is available only if leave of court is first obtained and granted. To be granted a leave, the court must be satisfied that the application has any of the following merits: good faith on the part of the applicant; the company is not interested in bringing the suit itself; it is in the best interest of the company; a serious question is involved, and; a notice to apply for leave was furnished the company or if non, that there was good reason not to do so. Under s. 1324 of the law, a shareholder can also apply for an injunction if a person in the company is acting or is attempting an act contrary to the CA 2001 or abets or encourages others in violating it. Under §246B-246G, a class right is granted when a corporation has no corporation provision as to varying or altering class rights, such rights can be varied or cancelled only if the members of the class of shares affected give their consent in writing with 75% of the votes consenting. Under s. 247, a member may also apply to the court to compel the company to provide him access to company books and records or to authorise another to access them on his behalf. Q2 Directors’ duties Directors’ duties may be classified as those under common law or those under statutory law. Their duties under common law are the following: duty to act bona fide for the interest of the company; the duty not to act for an improper purpose; the duty to exercise care and diligence; the duty to retain discretion; the duty to refrain from acts that may result in conflict of interest; the duty to keep confidential information from others, and; the duty not to take advantage of opportunities that come as a result of his position as a director of the company. On the other hand, a director’s statutory has similarities to his common law duties and are the following: duty of care and diligence and the business judgment rule under s. 180 of the CA2001; duty of good faith under s. 181; the duty not to make improper use of position as set forth under s. 182; the duty not to make improper use of information under s. 182; the duty not to be reckless or intentionally dishonest, otherwise, he will be subjected to criminal persecution, under s. 183; the duty to refrain from insolvent trading under 588G, and; the duty to refrain from disclosing material personal interests under ss. 191-195. References: Adams, M. (2005). Essential Corporate Law. Coogee, NSW: Routledge. Corporation Act 2001. Tomasic, R., Bottomley, S. and McQueen, R. (2002). Corporations Law in Australia. Federation Press. Read More