Company Law Course Assessment - Assignment Example

mраny Lаw Соursе Аssеssmеnt Name Course Date Соmраny Lаw Соursе Аssеssmеnt a) The issue in this case is identifying the type and class of a company that will best suit Susan and Rebecca. There are two types of companies in Australia, which are categorized according to the liability imposed on its shareholders. These companies are either a company limited by guarantee or a company limited by shares. A company limited by shares limits the liability of its shareholders to the value of their shares in the company. This company can either be a private or a public company. A public company limited by shares is a company with shares owned by the public at large. This company can also be referred to as a publicly held company. A public company is required to have at least one shareholder or member, but there is no limit in the maximum number of shareholders. Additionally, a public company is not limited on its ability to borrow funds from the public. However, the shareholders liability in a public company is restricted to the balance of the shares by the shareholders. A public company is also required to have the word “Ltd” or “Limited” after its name (s 148 (2), Corporations Act 2001 (Cth)). The other type of company limited by shares is the private or proprietary company, and it is noteworthy that these companies, unlike the public companies, do not sell their shares to the public. The requirement relating to transfer or sale of shares by these companies is usually restricted. A private limited company must have a minimum of one shareholder or member and can have up to a maximum of 50 non-employee shareholders. A proprietary company is limited by shares; meaning that it is incorporated with a share capital composed of shares held by each initial member on incorporation. The liability of the shareholders in a proprietary company is restricted to the uncalled amount of the shares of the shareholders. A proprietary company limited by shares must have “PtyLtd” or “Pty Limited” after its name (s 148 (2), Corporations Act 2001 (Cth)). A proprietary company limited by shares can further r be classified as a large or small company depending on its accounting requirements. A proprietary company can be classified as a large proprietary company in a certain financial year if it meets at least two of the following conditions. Its gross operating revenue for the company and its entities is equivalent to or exceeds $25 million, worth of its combined gross, assets, including those of its entities, at the close of the financial year is or exceeds $12.5 million. The company or its entities have a total of 50 employees or more at the end of the financial year (s 45A (3), Corporations Act 2001 (Cth)). On the other hand, a company can be classified as a small proprietary company for a financial year if the company satisfies at least two of the preceding conditions. The company’s combined gross operating income including those of its entities for the financial year is less than $25 million. The worth of the combined gross assets of the company and its entities at the close of the financial year is less than $12.5 million, and/or the company and its entities have less than 50 employees at the close of the financial year (s 45A (2), Corporations Act 2001 (Cth)). Another type of company is the no liability company, which is a form of a public company formed particularly for the mining industry in Australia. It is imperative that a no liability company has a share capital but does not have a contractual right in its constitution to recover calls on its shares from shareholders who fail to pay them (s 112 (2), Corporations Act 2001 (Cth). Form the case the capital base of the company is projected at $1.5 million where Susan and Rebecca contribute $200,000 and a loan of $300,000 from the bank. The additional $1 million is to be raised from issuing shares upon the registration of the company. Additionally, the company’s constitution is to contain an objects clause providing for the activities of the company. This objects clause is to restrict the business of the company to mining minerals; manufacture and sale of wrinkle free fabrics from these minerals. From the objects clause of the company, the type, and class of the company appropriate for Susan and Rebecca is a no liability company. The sole purpose of the company is mining purposes, which purposes include prospecting minerals, obtaining minerals by any mode, the sale and other disposal of minerals and conducting of any activity or business related to, or necessary for, any of the mining purpose (s 9, Corporations Act 2001 (Cth). Moreover, the company has a share capital, which is a prerequisite of a no liability company. Taking into consideration the preceding facts, therefore, the type of company that best suits Susan and Rebecca is a no liability company (Thomas and George 1896, 57.) b) The issue is the effect of the company’s managers entering into contracts over $35,000 without the approval and signature of the managing director as required by the company constitution. The constitution clearly provides that any contract exceeding $35,000 requires the approval and signature of the managing director of the company. A company’s constitution has an effect as a contract between the each member and the company, between each director and company secretary and the company and between a member and another member. Under this agreement each person consents to observe the constitution and rules provided they apply to that person (s 140 (1), Corporations Act 2001 (Cth). Additionally, if a company has a constitution, the constitution may contain an express restraint on, or exclusion of, the company’s application of any of its powers. The use of a power by the company is valid simply because it is in conflict with an express prohibition or restriction in the company’s constitution (s 125, Corporations Act 2001 (Cth). Browne-Wilkinson in Rolled Steel Products (Holdings) Ltd v British Steel Corp observed that not all the undertakings mentioned or listed in the objects clause are automatically matters in the strict sense. Some of these objects may only be auxiliary powers, existing, not as autonomous objects, but to allow the company to attain its definite objects. Lord Cairns LC in Ashbury Railway Carriage and Iron Co. Ltd v Riche, provided that it was the purpose of the legislature, not implicit, but essentially expressed, that companies, should not enter, having respect to the memorandum of association, into the contract. Lord Cairns further notes that the contract could not have been ratified by the unanimous assent of the whole corporation (Saharay 2008, 179). Concerning the directors of the company, it is notable that the directors of a company can award a managing director any of the powers that are exercisable by the directors. However, the directors can rescind or alter the conferral of authority on the managing director. Additionally, the powers of managing directors can be delegated except where the company’s constitution stipulates otherwise. These powers can be delegated to a director, an employee, a committee of directors, or any other individual. The exercise of this delegated power is as effective as if exercised by the directors. Nevertheless, the delegate must use the delegated powers in agreement with any instructions of the directors (s 198, Corporations Act 2001 (Cth). The clause in the company’s constitution provides that a contract in excess of $35,000 must be approved and signed by a managing director and since the company’s constitution is considered as a contract the party making such a contract must have the capacity to contract. Accordingly, the individuals competent to enter such contracts are managing directors. Where an individual is not a managing director or acting as a one on delegation of power, he/she is incompetent to enter into contracts. The rules of contracts require the parties entering into a legally binding contract to have the capacity to contract. The requisite capacity to enter into a contract is fundamental to the contract and lack of capacity renders the contract voidable. The only individuals qualified to enter into these contracts are the managing directors of the company. The House of Lords in Ashbury Railway Carriage and Iron Company Ltd v. Riche, (1875) L.R. 7 held that an act that is ultra vires is void in its commencement. This is because the company does not have the capacity to endorse it or even ratify it. If the stakeholders are allowed to ratify an ultra vires contract or act, it will be nothing but allowing them to do the very thing they are prohibited from undertaking. The House of Lords expressed the opinion that a company incorporated under the Companies Act has the power to do only the things, which are sanctioned by its objects clause in its memorandum. Anything else that is not ratified is ultra vires to the company, and it cannot be ratified or made effective even by the unanimous agreement of the members. The rule in this case is that anything that is not included in the company’s constitutive rules is ultra vires and thus cannot be enforced. Lord Selborne LC in Attorney-General v The Great Eastern Railway Co Ltd provided that the doctrine of ultra vires ‘must to be realistically, and not unreasoningly, understood and applied. Besides, anything that may justly be viewed as related to, or significant upon, those things which the constitution has authorized, ought not except where expressly forbidden to be regarded, by judicial interpretation to be ultra vires (Sealy and Sarah 2007, 245). Conversely, the interests and rights of innocent third parties dealing with the company are usually protected. The rationale in these circumstances is that the legitimacy of an action undertaken by a company shall not be questioned because of lack of capacity by reason of anything contained in the company's constitution. This principle favors persons contracting with the company in good faith, the authority of the directors to bind the company, or authorize others to bind it, shall be considered free of any restriction under the company's constitution. In Attorney-General v The Great Eastern Railway Co Ltd, the House of Lords found that a company had the indirect capacity and power to engage in transactions that were essentially incidental to the carrying out of the official objects, even if those dealings did not fall within the objects explicitly provided for in the company’s constitution. Consequently, contracts in excess of $35,000 entered by managers are void for lack of capacity to contract unless the managers are delegated powers to enter into such contracts or the third parties to the contract acted in good faith. Conversely, where the managers enter into contracts exceeding $35, 000 these contracts can later be ratified by the managing directors thus making the contracts binding. c) The issue is whether Susan and Rebecca can expand the business by making women’s clothing by using the wrinkle free fabrics. The functions and scope of the company’s work are enshrined in the company’s constitution. A company adopts its constitution upon registration where each member or shareholder agrees to the terms of the company’s constitution before the application is lodged or after the company’s registration and the company passes a special resolution to adopt a constitution, or a court order requires the company to adopt a constitution under section 233. The company can further repeal or modify its constitution, or a provision or provisions in its constitution, by special resolution (s 136, Corporations Act 2001 (Cth). Besides, a public company must lodge a special resolution with the ASIC repealing adopting or modifying its constitution and this change in the company’s constitution takes effect immediately or on the specified date depending on the circumstances. The company must also send a copy of the modified or new constitution to its members within 14 days of the change. Changing the purpose of a company and more so that of a no liability company may affect the type of the company in the incorporated activities is not in line with the requirements of the provisions for that type of company. The sole purpose of a no liability company is mining and any other activity that is connected to or part of the mining process. A company is allowed to change its type bypassing a special resolution aimed at changing the type of company (s 162, Corporations Act 2001 (Cth). Additionally, the company can apply to the ASIC for a change of type (s 163, Corporations Act 2001 (Cth) or the ASIC can change the type of company (s 164, Corporations Act 2001 (Cth). Where a company changes its type the existing entity is not affected by the change neither is its property nor legal actions undertaken by the company. In Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch D 656 the authority conferred on companies to modify the regulations contained in their objects is limited only by the clauses contained in the statute and the situations enclosed in the company's constitution. However, the authority conferred by it must, be exercised concerning general principles of law and equity which are appropriate to all authorities conferred on majorities and allowing them to bind minorities. This authority must be applied, not only in the mode required by law, but also legitimate for the advantage of the company, and it must not be overdone. In Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9, Scrutton LJ observed that when a person honestly endeavors to choose what will be advantageous to the company and decides upon a particular course, then, as long as there are the basis on which rational men could arrive at the decision, there should be no concern whether the court would or would not arrive at a similar or a dissimilar decision. The intended expansion by Susan and Rebecca to include the making of women’s clothing using the wrinkle free fabrics requires the modification of the company’s constitution to include this undertaking. Currently the company’s constitution provides for the scope of the company as restricted only to mining minerals, manufacturing, and the sale of wrinkle free fabrics. In order for the company to include this new venture, the constitution of the company must be changed. Nevertheless, this modification of the company constitution does not affect the type of company since the new undertaking falls within the requirements of a no liability company. The mining purposes, which no liability companies are required to undertake, include conducting any business that is necessary for or connected to mining. Making of women’s clothing using the wrinkle free fabric is connected to mining purposes, therefore, falls within the scope of no liability companies. Subsequently the only modifications necessary to include this undertaking involves only changing the company’s constitution. Bibliography Cases Shuttleworth v Cox Bros & Co (Maidenhead) Ltd [1927] 2 KB 9 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch D 656 Attorney-General v The Great Eastern Railway Co Ltd Ashbury Railway Carriage and Iron Company Ltd v. Riche, (1875) L.R. 7 Rolled Steel Products (Holdings) Ltd v British Steel Corp Books Saharay H.K. 2008. Company Law (Universal Law Publishing. Sealy L. and Sarah Worthington. 2007. Cases and Materials in Company Law. Oxford University Press. Thomas Rolin and George Edward Rich. 1896. The No-liability mining companies act, (60 Vict. no. 15).: Edited, with notes, cross references, and short chapters on the formation, management and winding-up of a no-liability company, and with a copious index. Hayes brother. Statutes Corporations Act 2001 (Cth). Read More