Corporations Law and Corporations Act Rule - Assignment Example

Running Head: Corporation Law Corporation Law Customer’s Name: Customer’s Course: Tutor’s Name: Jury 9th, 2012 Question 1 The above case is about shareholders who are concerned with the action of one of the directors on the decision he made of purchasing an area of native forest that would be used to fell trees and converting them to timber pulp. Issue 1: Corporations Act rule explains the roles of shareholders and directors in the decisions they make in carrying out transactions of a company. According to corporations law 2001 of Australia, there are duties that are appointed to the director and they include general duties under common law to exercise power with due diligence and care, he also has the mandate to manage and conduct the business in the best interest of the company and if the decision made was an informed one1. Lastly the directors should not expose their company to civil and criminal situations. In the application of the corporation law, the shareholders had a right to be consulted before any action had been taken by the director2. Under the company’s constitution and the general rule, in most cases the shareholders have a right to make company rules and sue the offenders3. On the other hand the director has a right to carry out informed decisions even without the shareholders consent. This is possible if the act being carried out does not involve any criminal liability4. In the Negotiable Instruments Act section 141, the act states that all directors are liable to their independent actions. In conclusion, the director though buying the native forest was for the purpose of the company, this decision would affect the shareholders because it involved funds that would be withdrawn from their accounts5. In this case the director would have consulted with the shareholders. Issue 2: Protection rule aims at enhancing security to everything that is alive and in existence. It takes measures to ensure everything under the state is safe and free from being destroyed. Under the Tree Protection Act 2005, its measures are to guard trees in forestry plantations, reserves, and nature strips6. This case involved felling of native trees in a forest which grow naturally and are extinct. This leads to Breaking the law and the Act protects trees requires one to pay for damages by paying heavy fines or even being sentenced for life imprisonment7. In application to the Tree Protection Law, the director was liable to the act he was about to carry out because it is an offence to fell down indigenous trees without permission from the government8. It is not stated if the trees he was about to buy had any effect on the environment or were causing any hazard to the people living around the forest9. In conclusion, the director was guilty of what he was about to do and this would lead him to a court of law that would charge him of being negligent of the law of land10. The director was not concerned about the environment and in cutting down trees; he would cause environmental degradation where the O-zone layer wears out hence increased penetration of the ultra violet rays11. Question 2 In Australia, the process of issuance of shares by a company to the public in order to raise funds is tightly controlled12. The statement issued by Airgon limited about their future operation presents an optimistic view of the future of their operations. Under the Australian Corporation Act such a statement may constitute an illegal Prospectus misstatement. However, it is unlikely to bring about liability under Australian law for the party offering the prospectus. The Corporation Act 2001-Section 715A (2) offers a defense to parties accused of contravening subsection (1) (by not wording their prospectus in a “clear, Concise and effective”) manner as it states this is not an offence13. However, a remedy for investors is provided under Section 739 that gives the Australian Security and Investment Commission (ASIC) powers to issue a stop order for any prospectus contravening Section 715A (2) subsection(1)14. Additionally, the Corporation Act 2001 - SECT 728 subsection 2 also controls the conduct of a company during the issuance of a prospectus to the public by requiring that companies have reasonable grounds before making forward looking statements in their disclosures15. Companies that contravene this requirement and make misleading statements are liable for prosecution by under section 728 subsection 3 which makes the issuing of misleading statements an offence16. If a company is found liable under the corporation Act such liability cannot affect the shareholders of the company as the Corporation Act limits their liability for actions of the company. The Act in Section 111J clause 1.1 states that a company is a separate entity from its shareholders and therefore they cannot be sued for offences committed by the company. Thus, the individuals that can be prosecuted for misstating prospectuses are those involved in directing the capital raising efforts. These include the directors of Airgon, the company providing the underwriting services, financial or industry experts quoted in the misleading statement and directors proposed in the misleading statement17. In Australia, court rulings touching on matters of prospectus misstatement are rare as the ASIC is able to handle the matters by applying its authority to stop issuance of disclosures containing misleading statements. Reiffel v ACN Ltd was one of those cases that made it to court in 1997; in the case the plaintiff sued a consultant who had presented a flattering statement in the prospectus of a construction project18. The consultant had forecasted that the investment would be favorable claiming it to be an independent appraisal of the investment opportunity but it later collapsed. In making its ruling the court found the consultant guilty of making a misleading statement in the prospectus under the Trade and Practices act; the predecessor of the Corporation Act, In conclusion, all individuals involved in the preparation or approval of disclosure documents for raising capital must be careful in the statements they make to avoid liability under the section of the corporation Act discussed above. However, investors must also carefully read and understand the prospectus as the same Act also offers various defenses for a company accused of Prospectus misstatement19. Answer to Question 3 Legal issues From the scenario, it is evident that there are legal issues about the company that the managing director Helen is under estimating. The company’s constitution state that any contract transaction exceeding $50, 000 in value is subject to approval by the board. However, regardless of this principle, Helen proceeds and negotiates a contract worth $240,000 on behalf of the company without seeking the board’s approval. The act of consulting a director who is not bound by Inventions Ltd constitution is unconstitutional. This is true when Helen who is a managing director of inventions Ltd consults Cody who is a managing director of Canberra Van Rentals & Sales Company. Moreover, Helen signs a contract without any other director’s approval to purchase the armoured vans to transport their product in the name of expanding the business. One can argue that, Helen was allowed by the constitution to transact or enter into a contract agreement which is less than $ 50, 000. As a matter of fact, Helen acted within the constitution when he entered into a contract with Canberra Van Rental &Sales Company when he hired vans, since the contract is worth $18,000. Finally, Helen entered in a contract with Cody which means that the two companies have entered into an agreement with each other without Helen revealing content of the constitution to Cody. Issue 1 Findings/ Provisions According to Australia common law, a contract is valid if, and only if, it has the two elements as contained in definition of a contract20. That is, an offer, and acceptance should form the basis of any contract be it informal or formal. Nevertheless, other elements like free and genuine consent, lawful considerations, lawful objects, agreement not declared illegal or void, certainty of meaning, possibility of the performance, and necessary legal formalities are essential to for a contract to be valid and enforceable at court of law21. It is worth noting that, for a valid contract to exist; the involved parties should have the contractual capacity. This is because there are certain parties and classes of people that do not have this capacity and any contacts entered by such parties are not binding or enforceable against them in a court of law22. Again, according to Australian Corporation Act 2001 clause 126 (1), a company’s power to make a contact may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company23. In addition, the power may be exercised without using a common seal. The same Act provide that once a company has entered into a contact with another company, it should comply with the terms and conditions of the contract failure to which the person responsible for making the contract on behalf of the company is held liable. Under Corporation Act 2001(Cth) Section 124, a company has the same legal capacity to an individual when it comes to entering into a valid contract24 .It also provides that the contract is valid even if the contract’s terms and conditions are over and beyond the provision of the company’s constitution. Advice/argument The findings and the scenario indicates that Helen entered into a legal contract when he engaged Cody to request for purchase of vans. From the scenario Helen offered to Cody to buy vans from his company in which he agreed. Agreeing meant that he has accepted the offer that was proposed to him by the other party (Helen on behalf of the company)25. To start with, the two basic elements of a valid contract are there hence Helen and Cody negotiated a valid contract26. Secondly, the intent of the offer is that Helen wants to expand Invention Ltd business by purchasing vans. The vans however are to be purchased from his ‘advising director’s’ company. For Peter and Paul to establish whether the contract is valid and legal; hence enforceable in a court of law, they must prove the essential elements of a legal contract as follows; that the consent of the contract is free and genuine27. From the scenario it is difficult to prove whether the consent of the contract is free and genuine. But since Helen has been a director for the company and he has delegating his duties accordingly, one can conclude that the consent or the intent of the contract is genuine. Furthermore, it is logical to state that Helen give the contract the lawful consideration when he was making an offer to Cody28. In that case, Peter and Paul have a good ground to base their argument in the sense that, if Helen considered all the possible outcomes, he was certain that the contract is legal and enforceable at law hence can bear the consequences. In this case, the lawful object in the agreement is the purchase of armoured vans. The law approves that any breach of contract relating to purchase of vehicles is enforceable and the party which is liable should compensate the other party. The scenario indicate that Helen as a director is not allowed to enter in to a contract exceeding $50,000, since the contract he entered into is worth $240,000 in amount and exceeding the allowed mark, one can conclude that the agreement is void hence illegal. The certainty of meaning comes in in the sense that, Helen has to prove that he meant to expand the Inventions Ltd business by purchasing the armoured vans. By so proving, he will have removed any doubts that he was purchasing the vans on his own personal interest29. The possibility of performance is the applicability of the contract. By all standards the contract entered into by Helen and Cody is performable. Finally, for the legal formalities the contract in this case has the legal formalities since the document of the contracts are there with Helen’s and Cody’s signatures. Conclusion In conclusion, it is evident that the contract entered by Helen and Cody on behalf of their respective companies is not only valid but also legal by all standards. It is upon Peter’s and Paul’s responsibility (on behalf of the company) to take the necessary measures by prosecuting Helen. The court should determine if Helen or the company is liable and advise the party with the burden of liability the amount to pay to Canberra Van Rentals & Sales Company. Since the Australia Corporation Law Act 2001 states that a director can enter into a contract on behalf the company, the chances it looks like the company is liable in this case30. Nevertheless, the constitution prohibits any director from entering into a contract surpassing $50,000. Since Helen was aware of this fact, the company can turn the liability to him for negligence. Finally, it is worth noting that though the case standards at 50-50 chance of either side winning. The company should have to show the content of its constitution like in the Peek v. Gurney (1873) case and should be enforceable at law. Issue 2 Findings/ provisions The Australia Corporation Act 2001 also provides the duties of a director as that, a director should act on behalf of the company with diligence and care31. A company’s director should delegate his duties in good faith and in the best interest of the corporation. On the same point, directors are not allowed to use their position to gain advantage in their own favour or interest. Directors are also advised not to use their position to gain advantage on the company’s or someone in the company favour32. In the light of this, for a director to constitute a fraud there must be active misstatement of facts or terms in the sense that withholding of that which is not stated makes that which is stated false. For example in Peek v. Gurney (1873) case33 the brochure that was used by the company did not indicate the any existence of a document stating the liabilities. This connoted that the said company was a wealthy one but contrary that was not the case34. Advice/argument As it stands and according to Inventions Ltd constitution, Helen is not a director of that company due to the fact that he is subject to confirmation of the board as a director which has not happened for the last 12 years. Therefore, it is logical for one to say that Helen is not a constitutional director of Inventions Ltd Company since he is not confirmed35. The act of entering into a contract and bearing in mind that he is not conformed as a director leaves more questions than answers. As the director for more than 12 years, he should be aware of the content of the constitution. Moreover, in delegating his duties he should act on good faith of the company. As mentioned above, a director should not act to gain advantage of his own position or any other person in the company36. This means that if Helen had this knowledge, the contract he entered into is based on the sole interest of the company. The Australian Corporation Act 2001 part 2B states that a company may appoint a director at a general meeting or the appointment may be from other directors37. This provision gives Helen the mandate to consult Cody as an advising director of Inventions Company. Nevertheless, the Act states that the appointment of the new director is subject to approval by the board in the next annual general meeting. As it stands, Cody was not approved by the board in the AGM so he is not a legal director of the company38. The law also states that any director has the power to appoint a director but with consultation and consent from other directors. From the scenario, Helen did not consult or seek consent from Peter and Paul hence Cody cannot be termed as a legal director39. Under Corporations Law Act Section 131, any person who was previously acting in a position of a director may be released from liability but is not entitled to indemnity i.e. any person or party may be released from all or part of the liability. In this case, the person may have acted or reacted to purport that he is a trustee of the company. These facts partially remove the burden of liability from Helen and put it on the side of the company40. Under Section 203 of Corporation Act, a director may be removed from power if a resolution is reached by other directors. These acts may be included in the company’s constitution which every director must have a copy. Therefore, Peter and Paul as directors of the company should confirm whether this power is documented in their company’s constitution and if yes, consider removing Helen from power after a resolution41. Conclusion The liabilities and responsibility of a director are derived from various sources such as company’s constitution, case laws and statute laws42. In that case, if a director does not comply with his duties as a director as constituted, he/she may be liable either to criminal or civil offence and may be disqualified from acting as a director. Though case laws provide principles that are elaborate to the responsibilities and duties of a director, they tend to be complex more so when it comes to applicability. The non-statutory guidelines like the company constitution therefore provide general principles for the performance and exercise of power. Helen in this case has to prove that he acted in the interest of the company but not his own interest and that has not delegated powers of directorship to Cody. It is therefore important for Peter and Paul to prove whether Helen has acted contrary to either the statutory laws or the company’s constitution. If they prove that he has committed an offence, they should then proceed to a court of law or remove Helen from his position. Finally, if Helen is guilty of any offence either by error of omission or commission, he should compensate the company for any losses that may be incurred in the process43. Bibliography A. Articles/Books/Reports Austin, R (2007) Company Directors and Corporate Social Responsibility: UK and Australian Perspectives. Sydney: Ross Parsons Centre for Commercial and Taxation Law. Butt, P, (2006) ‘.There but for the grace ... 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