Company Law and Corporations Act 2001 - Essay Example

? Company Law No: Company Law Question No Advise Leaping Lizard Coffee Emporium Pty Ltd on whether the company will have to honor the contract for $25,000 that has not been approved and signed by the managing director. Corporations Act 2001 The Corporations Act 2001 in fact an act of Commonwealth of Australia that deals with the business entities of Australia from federating level to inter state level. It mainly focuses on companies besides other entities like partnerships / managed investment schemes1. The Corporations Act is an important legislation passed by the legislators that governs the companies in Australia. It deals with the issues of formation and operation of companies in line with the constitution of the company; determine responsibilities of officers, process of acquisitions, mergers and fundraising2. Duties of Directors Directors should not deploy themselves in a critical position where they are unable to serve in the best interest of the organization. This inclusive of entering into commercial transactions with other entities where one cannot take decisive part in making a decision for the company. For example; directors are morally, legally and ethically bound to carry out transactions in good faith which could benefit the company. If a director does not meet the mentioned qualification, the contract he or she inked with other company may be set aside by the Board of Directors. Therefore, directors have to be very careful about their defined role in terms of negotiations or execute a deal with other companies3. In case, the director of the company steps out from his or her shoes, then the board of directors have the prerogative to decide whether to initiate action or not against the director at fault for jeopardizing the interest of the company besides voiding the contract executed with the other company4. The court while examining the case shall take into consideration the key elements that compelled an officer of the company to carry out transactions in specific circumstances and to fix responsibility in terms of breaching of trust5. According to Section 180 of the Corporations Act, wherein the role of director is clearly defined in the following manner: To take decision in good faith and for meaningful purpose Transaction with other company should not reflect personal gains To inform other members of the board concerning the transaction to seek their confidence. Decision should be rational and in the best interest of the company. The above requirements are to be fulfilled by the directors in order to satisfy the statutory duty of care and due diligence6. Business judgment In accordance with the section 134 of the Corporations Act, the upper and the bottom layers of the management should respect the provisions of the Corporations Act and the constitution of the company. The company in its own discretion can have one or more replaceable rules contained in the Corporations Act in place of Constitution. In accordance with Section 140(1) (b) of the constitution and replaceable rules have the direct bearing on a Contract that executes between the company, each director and secretary. Under the mentioned scenario each one agrees to abide by the constitution and the rules in vogue7. Here we can take example of Turquand’s case, according to which, an agent belonging to the company can make a contract without any authority, which is not in knowledge of the outsider. A rule is settled that ensures the protection of outsiders until and unless the security of company is not at stake8. Another case Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising Co Pty Ltd can be taken as an example to show that a person who lacks actual authority cannot be entered into a contract on behalf of the company and prior approval is required for entering into a contract by some person having actual authority not apparent one9. Sixty-Fourth Throne Pty Ltd v Macquarie Bank Limited [1998] 3 VR 133 is another example where Kandy used authority of managing director when he did not have authority of managing director for making contracts10. ASIC v Adler and Ors The case under discussions wherein a payment of USD 10M made to Rodney Adler, sole director of a company by a subsidiary. Through trust mechanism, an amount of USD 4 million utilized to acquire HIH shares. Unlisted investments were purchased from sister concerns of the parent company of Adler and loans were created for the entities associated with the parent company11. The above transactions lacked a) board approval b) member’s consent c) disclosure of information d) loans extended without proper documentation and e) Security. The Competent Court of Law found that Adler had violated sections 181, 182, 183 and 184 of the Corporations Act 2001 which deals with the director's duty as under a) act in good faith and for a meaningful purpose b) improper use of official position c) improper use of information and d) exercise due care and due diligence12. The court further observed that three former directors of HIH which is a subsidiary of Adler’s company along with controlled entities found contravening section 79 of the Corporations Act besides transactions that carried out fell within the ambit of arm’s length exception13. Legal view of the case under discussion: Leaping Lizard Coffee Emporium Pty Ltd will have to honor the contract for $25,000 that has not been approved and signed by the managing director provided: Post fact approval by the Managing Director to endorse the deal that inked by mentioned two directors in good faith. Post fact approval by the Board of Directors to regularize the deal. In other wise situation, the deal would become void. The company may initiate administrative / legal action against the defaulting directors for not seeking prior approval of the deal from the above cited competent authorities which amounts to stepping out of assigned role of the directors as defined in the Corporations Act. Question No. 1.2 Discuss whether or not the directors of Leaping Lizard Coffee Emporium Pty Ltd are in breach of the company constitution / replaceable rules by issuing shares to Ariffin. Also explain what remedies are available to the shareholders to protect their rights from potentially oppressive changes to the constitution. There cannot be two opinions about the robust economy of Malaysia which attracts foreign investment in a mass scale. There are number of businesses operating in Malaysia either in the control of government or have the considerable government stake. The financial sector is very well guarded by the Central Bank of Malaysia and the Securities Commission of Malaysia as well. Malaysia is facing cut throat competition with other competitors in and around the globe to boast their economy. To further strengthen its economy, the Malaysian Government liberalizes its foreign ownership policy in the manufacturing sector. To increase inflow of foreign funds, number of incentives is being offered by the government to foreign investors enabling them to invest in more lucrative areas. Apart from other developments, the government is emphasized on developing infrastructure to facilitate foreigners to run their business efficiently and to provide them quality of life. The other day the government introduced more business friendly rules to upgrade financial sectors to woo more international key players to operate14. At the same time Malaysia is striving hard to achieve the status of developed world. To achieve this vision of 2010 within a span of five years, government has chalked out a sound plan to execute their projects. The new company may have its own constitution to comply with. In other wise situation, company may rely on Replaceable Rules contained in the Corporations Act. An Australian company may have a single share holder. If that single share holder is another corporate entity than the new company is wholly owned subsidy of a Parent Company and the Parent Company would be the ultimate holding company. The Parent company can be a foreign company which owns 100% shares. In the mentioned case, there is no requirement of Australian shareholder15. As far as the transfer of shares to the offshore directors of the company in order to ensure strong presence of the company in their area of operation are concerned, it can be done simply by amending the company’s constitution. After necessary amendment in the constitution, the Board of Directors may approve transfer of company’s shares to the non resident director. The amendments in question made in the constitution to be notified to ASIC by the company as a mandatory requirement16. According to the Australian Corporations Act 2001, the Board of Directors of the Company is empowered to amend its constitutions to remove the replaceable rule on pre-emption rights to issue shares at their discretion to its foreign director who has the experience and expertise to run the affairs of the company with reference to introducing the company’s products in a befitting manner17. In the case under reference, the remaining three shareholders (members) are not at all happy about the decision taken by the Board as they thought that it breach of the company’s constitution to accommodate the director who is residing in Malaysia which is a chosen place for expected business outlet by the Leaping Lizard Coffee Emporium Pty Ltd. Here we can take example of Bailey v NSW Medical Defence Union Ltd in which, “the terms of a corporate constitution can be varied without the agreement of all the members since a special resolution requires only three-quarters majority vote”18. It is very much clear from the Australian Corporations Act 2001 that Leaping Lizard Coffee Emporium Pty Ltd to Ariffin one of it would be foreign director by amending its constitutions which subsequently requires approval of the competent authority. Here we can take example of Mutual Life Insurance Co. of New York v The Rank Organisation Ltd which deals with Company Act 2006 under section 994 and also states a decision against oppression and unfair prejudice. According to the case, every stakeholder must have equal treatment and there should be no discrimination19. With regard to protect the rights of shareholders in case of oppressive changes in the Constitution by the Board of Directors, we may invoke the provision of section 994 of the Companies Act. According to which “A member of a company may apply to the court for an order on the ground that the company's affairs are being run or have been conducted in a manner that is unfairly prejudicial to the interests of its members generally or of some part of its members”20. The mentioned section in fact protects the interest of the minority shareholders in circumstances where the majority shareholders act in a way which is detrimental to the interests of minority shareholders. Moreover, in view the effective role of the Central Bank of Malaysia and the Security Commission of Malaysia, the chances of jeopardizing the interest of shareholders are diminished. Bibliography CCH 2011, Australian Corporations and Securities Legislations. McPherson Printing Group, Australia. Harris, J, Hargovan, A and Adams, M 2011, Australian Corporate Law, LexisNexis, NSW. Chapple, Larelle and Lipton, Phillip 2002, Corporate Authority and Dealings with Officers and Agents, CCH Australia Limited, Melbourne, Viewed 16 September 2012, . Mutual Life Insurance Co. of New York v The Rank Organisation Ltd. [1985] BCLC 11. NTAA Corporate 2012, Companies, Trusts, Super Funds, viewed 5 September 2012, PWC 2011, A guide to directors’ duties and responsibilities for non-listed public companies and proprietary companies in Australia, PricewaterhouseCoopers International Limited, Australia. [Online]. Available at: http://www.pwc.com.au/legal/assets/GuideDirectors_Apr08.pdf (Accessed 5 September 2012). Shareholder Disputes 2011, Section 994 Companies Act 2006, viewed 5 September 2012, Tomasic, R, Bottomley, S and McQueen, R 2002, Corporations Law in Australia, Federation Press, NSW. Read More