Classifying the Company According to Liability and Membership - Case Study Example

Business Law: Problem Solving [Name] [Professor Name] [Course] [Date] Introduction This paper presents a case analysis examining various legal issues. The type and class that a mining company with constitution specifying the mining purpose would be designated, whether a company would be bound by a contract entered into by a director who is in breach of the constitution and whether a company would be bound to comply with contracts entered into by director for actions that are outside the company’s objects clause and any action available to the company. The type and class of company that they should incorporate Issue Classifying the company according to liability and membership Legal Principles Corporations Act 2001 (Cth) Section 112(2) sets out that a no liability company is one that has a share capital, has incorporates a constitution specifying the sole objects of the company are mining purposes, and that the company seeks not to recovers calls made on its shares. Sections 112(3) of the Act further specifies that such a company must not participate in activities that are outside the scope of its mining objectives. Within this perspective, it is critical to establish the definition of the mining purposes by the law. Section 9(b) and Section 9 (c) of the Act specify that mining purposes means obtaining by any means minerals and the sale of minerals or their products of mining1. Towards this end, the company can be registered as a ‘no liability company’ under Section 118 or 601BD of the Corporations Act 2001. Corporations Act 2001 (Cth) Section 112 further specifies that a no liability company may only be a public company. Application Based on the facts presented by the case study, the company has share capital. Further, it is restricted to mining and makes calls on share only when needed. For instance, in the case, Bill and Ben have discovered certain mineral the need to use for production of anti-aging lotions and cream. Although the two would need a $2 million venture, the two already have a share capital as they plan to use their $500,000 worth of savings and a further $500,000 loan from a bank. Although they are likely to raise the remaining capital through share issue, they plan to make a call on the shares only when required by the company. Their plan is to have a constitution specifying that the company’s primary business is restricted to mineral purposes – mining, manufacture and sale of anti-aging cream. Conclusion Bill and Ben should be advised that the type and class of company they should incorporate is a no liability company, which in this case may only be a public company. Whether their company would be bound to comply with contracts over $200,000 entered into by Joe without the approval of the board of directors. Issue The central legal issue is whether Joe has the legal capacity to enter into the contract; whether he has legal authority to enter into the contract; and whether there is a breach of duty. This calls to attention the principles of agency law. Legal Principles For a company to become bound, three factors have to be taken into consideration. First, the person has to have legal capacity to enter into the contract. Second, the person seeking to bind the company must have the legal authority, or the person he is dealing with is entitled to assume there is an authority. Third, there has to be no breach of duty2. Corporations Act 2001(Cth) Section 126 specifies that a company can enter a contract through an agent. Section 126(1) sets out that an individual acting with the express permission or authority of the company, or on behalf of the company has the power to make, ratify or vary a contract3. Application In the case, Bill and Ben plan to appoint Joe as the managing director of the company. Under the Section 126 of the Corporations Act 2001, Joes is entitled to act on behalf of the company as an agent. In this case, the director would be an agent while the company would be the principle. In general, the question as to whether a director has authority to bind a company through a contract is subject to the agency law. In companies with more than one director, a director who acts individually lacks the authority to bind the company on account of his position as an agent. These facts were demonstrated in the two case laws Northside Developments v. Registrar General4 and Brick & Pipe v. Occidental Life5. Constitution The authority or scope of authority of the director is subject to the company’s constitution6. With regard to the case study, the constitution stated that any contract that requires spending of over $200,000 need approval by the board of directors. Application Therefore, if Joe enters into a contract required spending of over $200,000, he would have breached the constitution. Under the common law, contracts that a company enters into that is deemed to be outside the scope of the corporate constitution is considered as not binding the company. These rules were held in the case Freeman & Lockyer v Buckhurst Park Properties (Mangal)7. Indeed, section 198A(2) specifies that a director may exercise all power of the company excess that that is restricted by the company’s constitution Actual authority Under the common law, an agent authority is recognized under actual or ostensible authority. Actual authority materializes where the principle has given consent to the agent to act on their behalf. The keyword with this regard is ‘consent.’ Here, there must be a legal relationship between the agent and the principle8. The relationship should result from consensual agreement that they alone are the parties, as was demonstrated in the case Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd9. Further, the power of the board of directors to consent is protected under section 198A of the Corporation. In which case, failure of the Ben and Joe to consent implies that Joe has no Actual Authority, and therefore the contract will not bind. Conclusion If Joe enters into a contract of over $200,000 without the approval of the board of directors, the company would not be legally bound. Whether their company would be bound to comply with contracts entered into by Joe that is outside the company’s objects clause and any action available to the company. Issue The central legal issue is whether the contract would be valid, and if not, whether the company would be bound; whether Joe has the actual authority to enter into contracts that are outside the company’s scope of activity. Legal principles The scope of the agent’s authority can be determined by applying the principles of creating a contract. An agent who has the actual authority to enter into a contract on behalf of the principle legally binds the company if the agent acts within the scope of actual authority10. Under the common law, contracts that the company enters that are outside the scope of the company’s constitution are generally regarded as not binding on either the contracting party or the company. This principle is called the doctrine of ultra vires11. Applications In the case study, Bill and Ben propose to contain in their company’s corporate constitution object for which the company’s formed. Their plan is to have a constitution specifying that the company’s primary business is restricted to mineral purposes – mining, manufacture and sale of anti-aging cream. This signifies the company’s object clause. Therefore, when the company seeks contracts beyond the object clause, it will be regarded as ultra vires, and consequently void to be ratified by the board of directors. The doctrine of ultra vires was demonstrated in the case Ashbury Railway Carriage and Iron Company Ltd v. Riche12. Therefore, the company would not be bound to comply with the contract outside the company’s objects. This is since Joe has not consent to execute the contract. Second, this is since the contract is outside the scope of the company’s operation, it would be viewed as invalid under the doctrine of ultra vires13. Conclusion Bill and Ben should be advised that the type and class of company they should incorporate is a no liability company, which in this case may only be a public company. Second, if Joe enters into a contract of over $200,000 without the approval of the board of directors, the company would not be legally bound. Lastly, the company would not be bound to comply with the contract outside the company’s objects. This is since Joe has not consent to execute the contract. Second, this is since the contract is outside the scope of the company’s operation, it would be viewed as invalid under the doctrine of ultra vires. Bibliography Androphy, Joel, 'General Corporate Criminal Liability,' (1997) 60(2) Texas Bar Journal Cassidy, Julie, Concise Corporations Law (Federation Press, 2006) 102-106 Chugh, Promila & Hari Ram Yadav, Doctrine Of Ultra Vires Under Companies Act 1956 (27 Oct 2013) Deloitte, The Duties of Directors (27 Oct 2013) Ferguson, David, Australia: The Statutory Contract (27 Oct 2013) Lipton, Phillip, ‘A History of Company Law in Colonial Australia: Economic Development and Legal Evolution,’ (2004) 31(1) Melbourne University Law Review 805-836 Tomasic, Roman, Stephen Bottomley & Rob McQueen, Corporations Law in Australia (Federation Press, 2002) 230-248 Case Laws Ashbury Railway Carriage and Iron Company Ltd v. Riche, (1875) L.R. 7 H.L. 653 Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 10 ACLC Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480] Northside Developments Pty. Ltd v Registrar-General (1990) 170 CLR 146 Read More