Company Law - Wholesale Coffee Roasters Ltd - Assignment Example

Company Law Name Title of the course Instructor’s Name 19th September, 2012 Question 1.1 Step 1: Issues 1. Validity of the contract 2. Position of the company 3. Position of Anna and Susanna Step 2: Rule/Law According to section 126 of the corporation act 2001, Anna and Susanna have the right to enter into a valid contract as the agents of the company(s 126, Corporations Act 2001 (Cth)). So, Wholesale Coffee Roasters Ltd salesperson had the right to make the assumption enshrined under section 129 which states that any person acting on behalf of a company has/have the powers to enter into a contract as an agent/s of the company (s 129, Corporations Act 2001 (Cth)). In addition, the contract is valid from the salesperson viewpoint since it has the four necessary conditions of a binding contract. Section 124 allows people to recover debts owed by the company even where the interests of the company are not served(s 124, Corporations Act 2001 (Cth)). Section 125 of the corporation act 2001 asserts the exercise of legal capacity by a company cannot be invalidated because it is prohibited by the company’s constitution (s 125, Corporations Act 2001 (Cth)). Therefore, despite Anna and Susanna entering into a contract that is not approved by managing director of the company; the company still is liable. A person/s that enters into a contract on company’s behalf may be found liable not only for the action but also for any damages/costs that may result from the contract. Under section 198D of Corporation Act, a director of a corporation is given the mandate to delegate authority to enter into a contract (s 198D, Corporations Act 2001 (Cth)). Step 3: Application From the onset, it is important to point out that the salesperson and the two directors entered into a valid contract since it have all the elements of a valid contract. Nevertheless, the two directors-Anna and Susanna lacked the legal authority to enter into such a contract on behalf of the company (Austin, 2007). Statutory law in the Corporation Act Section 124 gives the same legal capacity to companies as it gives to individuals (s 124, Corporations Act 2001 (Cth)). Both section 124 and 125 states that a company cannot invalidate its capacity to enter into a contract if its interest is not served by the contract or is prohibited by its constitution. Therefore, the contract entered to by Anna and Susanna is not valid from the company’s perspective. However, the company must honour the contract because the two entered into that contract with the sole interest of the company (Ford, Austin and Ramsay, 2001). In other words, the company cannot avoid the contract with the salesperson since it was entered on its behalf by Anna and Susanna. Section 124 tells us that; even if the exercise of power goes against the interests of the company the company cannot cite this as an exit to the contract(s 124, Corporations Act 2001 (Cth)). From the Freeman and Lockyer v Buckhurst Properties the conditions are; the agent must have held out to the outside world as having the power to enter into contract on behalf of the company, representation must have been made by a person with actual authority as regards to the matter of the contract, the insider must rely on the holding out to enter into the contract, and the company constitution does not profit the company the capacity to enter into that type of contract or the power to delegate that capacity (Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480). Under the Corporation Act 2001 the last two conditions need not be met. However, the company’s constitution limit the capacity by stating that if the contract exceeds $ 20,000 the person making the contract must seek approval of managing director (Singh & Kaur, 2011). Besides, even if the company’s constitution may have prohibited Anna and Susanna from entering into a contract on behalf of the company; section 125 states that a company cannot be able to invalidate the contract and therefore it would be liable to pay the remaining amount to Wholesale Coffee Roasters Ltd. Finally and as stated earlier, Anna and Susanna are not liable of their action since they acted with the sole interest of the company (Austin, 2007). Step 4: Conclusion In conclusion, the contract between the Wholesale Coffee Roasters Ltd salesperson and the two directors cannot be regarded as invalid and void as the company cannot cite that its interest were not served hence escape the contract’s obligations (Austin, 2007). As supported by section 125 of the corporation act, the directors have the authority to enter into a contract regardless of the company’s constitution negating it (s 125, Corporations Act 2001 (Cth)). The two directors can rely on section 182 to escape liabilities for making a contract since their sole interest was the company and they had no ill motives (s 182, Corporations Act 2001 (Cth)). Question1.2 Step 1: Issue The issue at hand relates to breach of contract in directors duties and responsibilities. Another issue that relates to this case is the duties of shareholders in decision making and the where the directors can act on behalf of the shareholders. Step 2: Rule/Law The Corporations Act 2001(Cth) outlines the duties of a director with regards to an organization. Among the duties stipulated in the act is that: 1. Directors have a duty to act with the best interest of the company and for the right purpose. By this, the law says that directors should not work with self-interest at heart but what will benefit the corporation as a whole. 2. Directors should take much care in the responsibilities that they are given. By this they should carry out their duties with a degree of care and in everything have a rational judgment in the decisions made on behalf of the organization. In all the decisions made by them, they should ensure that they are reasonably appropriate to the organization. 3. Directors should not misuse the positions in which they are given to gain advantage of themselves. This means that they should take note of where they are restricted to exercise their power. Misusing a position means that directors can carry out any organizational transactions without involving the shareholders thus breach of contract. 4. Sec 135 states that before any sale of shares to an outside party, directors must first offer the shares to the existing shareholders of that class which is referred to as insider trading. This section further talks about pre-emption for existing shareholders on issues of shares and states that before any issue of shares, directors must first consult the shareholders by making a statement and by a resolution made in a general meeting, directors can be authorized to make the issue under subsection(1). 5. Section 260B of the Corporation Act states that it is the work of shareholders to approve or to pass a special resolution with the person acquiring shares and it should be done in a general meeting. Step 3: Application The issue at hand is of an organization named Leaping Lizard Coffee Emporium Pty Ltd. which has dreams of extending its business line in Malaysia with the assistance of the directors it has appointed. However without the consultation of the shareholders, the directors appoint Arrifin to be the director in Malaysia as he has experience dealing with foreign business. They further sell 1000 ordinary shares to Arrifin. The shareholders are angry that the company constitution was amended and there was sale of shares without their information which makes the directors breach contract. In the above case study the directors did what they thought was best for the company as it has the powers to make decisions on behalf of the company. They are responsible to carry out their duties with the interest of the company at hand as in the case of ASIC v Adler (2002) 41 ACSR 72; [2002] NSWSC 171.The directors consulted Arrifin in Malaysia to be their director as it is through him that effective business transactions would be carried out. Section 198A in the powers of directors say that they have the power to issues shares but they should however do it with the consultation of the company shareholders However when the directors did not consult with the shareholders on the issues regarding sale of shares regarding to the case of Permanent Building Society v Wheeler (1994)11 WAR 187 and amending of the company constitution, they were going against the company constitution. This is because there was no approval in any general meeting which would make the shareholders have a resolution on whether to pass the idea or not. By the directors having to issue shares to the director in Malaysia was not a breach of contract because they were representing the company and it was not in any way misuse of the positions given to them. Step 4: Conclusion The directors of Leaping Lizard Coffee Emporium Pty Ltd have breached the company constitution as they did not inform the shareholders of the action that they were going to take and in any case that the director who was based in Malaysia would reject their appointment, the shareholders would be eligible to pay for the loss incurred. To protect the shareholders from oppression the directors should be penalized hence a remedy is given to the company shareholders as this would have brought about a loss. Section 1350 of the Corporations Act paragraph 51 states that the person who acquires the property is liable to paying for the compensation and the company can sue the directors for not consulting them on the sale of shares or even worse amending the company constitution to suite their wishes without the knowledge of the of shareholders. Bibliography Austin, R. Company Directors and Corporate Social Responsibility: UK and Australian Perspectives. Sydney: Ross Parsons Centre for Commercial and Taxation Law (2007) Ford H.A.J., RP Austin, R. P and Ramsay, I.M, Ford’s Principles of Corporations Law (10th Ed), Sydney: Butterworths (2001) Singh, J & Kaur, G. Australian Corporate Law Volume-3: Under Corporations Act, 2001. Australia: VDM Verlag Dr. Müller Publishers (2011) Legislation The Corporation Act 2001 (Cth) Legal Authorities ASIC v Adler (2002) 41 ACSR 72; [2002] NSWSC 171 Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 Permanent Building Society v Wheeler (1994)11 WAR 187 Read More