Case study Essay Example

  • Category:
    Law
  • Document type:
    Case Study
  • Level:
    Masters
  • Page:
    4
  • Words:
    2665

Student’s name

Contents

3Electing Claude as the Chairman 1.0.

3Application of the relevant law to the issue 1.1.

4Conclusion of the issue 1.2.

5Daisy as a director 2.0.

5Application of the relevant law to the issue 2.1.

7Conclusion 2.2.

7Varying voting rights of family shareholders 3.0.

8Application of the relevant law to the issue 3.1.

9Conclusion 3.2.

9New Business debt insolvency 4.0.

9Application of the relevant law to the issue 4.1.

10Conclusion 4.2.

11Bibliography 5.0.

  1. Electing Claude as the Chairman

The first issue in this case is whether the election of Claude was in accordance with Corporations Act 2001 and in so doing, did not infringe rights held by other shareholders—Bella and the family members. In order to advice Bella, Daisy and the rest of the family members, sections of the Corporations Act 2001 and other jurisdictions are going to be considered so as to distinguish facts regarding the issue. To begin with, section 198 deals with provisions that applies as replaceable rules owing to the fact that the Company adopted replaceable rules under the Corporations Act 2001. Secondly, the case considers section 248A, 248C and 248E which details director’s meetings.

    1. Application of the relevant law to the issue

Applying the above rules, it needs to be noted that across all jurisdictions, the business of a company must be managed or be under the control of directors. Secondly, these directors—Able, Bella, Claude, Zac Brown and Bella’s family members have special (in some instances varied) powers that can be exercised depending on the circumstance. According to section 198A, sub-section 2, in the event the company does not have its constitution, the powers conferred by this Act authorises these shareholders to exercise their powers in general meetings. This approach is consistent with that is in United Kingdom where the statutory provisions allow directors to exercise given powers including issuance of shares, borrowing money or debentures1. Relating this section with the Act, first, by virtue of class shares owned, the four directors have equal voting rights. Secondly, family shares have been limited to participate in dividends at 10% of the rate of management class. Therefore, the decision to elect Claude at the meeting is justified since by getting proxy vote, they have more votes to move the motion. To concretise this position, section 198B of the Act (negotiable instruments) allow the four shareholders (those with class shares) to draw, accept, endorse sign or otherwise execute functions in different ways.2 For reasons of simplicity and greater clarity, events leading to the election of Claude are better understood from section 198B (replaceable rule—see section 135) where the two shareholders have the mandate to vary or revoke a conferral of powers on Bella as the Managing Director of Maple.

Applying section 248 of the Corporations Act, it needs to be established that Maple Pty Ltd’s internal management can governed by Corporations Act 2001 that applies to its replaceable rules but not its constitution, voting rights held by members or combination of both. Having established this, section 248A of the Act allows Claude and Zac to pass resolution without asking Bella for a meeting.3 As this sets the platform, section 248E (chairing directors meeting) confers powers to the directors to participate in the process of electing a director to chair their meeting. While this is the clause that mandated the election of Claude as the chairman (considering the fact that they had proxy vote), by virtue of quorum and voting rights4 it was not going to be possible to stop the election of Claude during the meeting.

    1. Conclusion of the issue

Concluding on this issue, it can be felt that considering voting rights, acquisition of proxy vote and Corporations Acts’ mandate to elect chairman, there is little dispute in practice on how Claude was elected. It would be good to clearly provide that the general meeting has powers to appoint directors, nominate or elect chairmen subject to two critical issues; first, that the director elected had not been elected to chair the meeting or in the event that a previously elected chair declined to act or was not available for the meeting.5 This conclusion is consistent with the argument made by Andrew (1999) regarding the case involving Alinta, Gyles and Lander. In this case, the Federal Court ruled that the election of Alinta as the chairman of the meeting did not contravene either the constitution of the company or Corporations Acts 2001. By the way of example, the court considered an application based upon sections 198 and 248 (which are required to invalidate elections made by directors). Furthermore, a number of jurisdictions now argue that since applications made to challenge elections of chairmen are not based on relevant Acts or constitutions, such applications in themselves contravene Acts or the constitution therein (Company Law Review 2003)

  1. Daisy as a director

The second issue in this case is to ascertain whether Daisy by virtue of her actions, is a director of Maple Pty Ltd. This understanding is underpinned in Section 9 of the Corporations Act 2001. Definitions in this section is therefore going to be considered with other jurisdictions in a view to distinguishing facts regarding Daisy and whether she breached all or part of the Act.

    1. Application of the relevant law to the issue

Maple Pty Ltd being a legal entity can only act though natural persons to enable its affairs to run. In principle, anyone has the ability to act as a direct. This view is consistent with section 9 of the Corporations Acts. This Act recognises a director as a person. In part, section 9 (a) also recognises that this person can be appointed and so can act as alternate director. Furthermore, there exists no statutory academic or other qualifications to be considered while appointing or acting as a director of Australian company; either proprietary or public (Company Law Review 2003). The only legal requirement is that the person be above 18 years of age (section 201B of Corporations Act 2001). These facts put Daisy in a position of a Director. While this is one side of the Act, the other part—section 9 sub-paragraph (b)(ii) argue that merely because Daisy advised Bella and he took the pieces of advice on proper performance of the company do not qualify her as a director. In relation to this, Modern Company Law for a Competitive Economy (2004) explain that the capacity of Daisy can be that of professionals hired by a company and this do not make them directors as the title implies a position highly eminent.

Arguing from other litigations, the question or aspect to which the duties of directors owned has always been known to be the company as a whole. This understanding was interpreted by court of appeal of United Kingdom6. In short, whether an outsider is working with instructions from director(s) or voluntarily offers directions to director(s), such directions are considered to wholesomely affect general performance of the company. Therefore such parties are considered directors. However, in some instances the nature of the relationship between managing director and an outsider can be fiduciary. In such cases, the law considers that the fiduciary obligations are owed by the managing directors to such outsiders. Using this litigation, it can be argued that Bella as the managing director did not comply with the duty of skill, care and diligence (this is statutory equivalent as enshrined in section s 180(1)).

How does Bella’s behaviours compelling Daisy to become a director? In Australia, directors are defined by the Corporations Law, equity and common law to meet certain levels of care and diligence. However, from this case, Daisy has resumed these roles since Bella does not like the hard work involved in running of the Company. Therefore broadly speaking, while Bella is in breach of care, Daisy has resumed the roles. In addition, section 181 of the Corporations Act 2001 state in part, “…a director or other officer of a corporation must exercise their power and discharge their duties.” This is exactly what Daisy is doing through Bella. Though Daisy has not been validly appointed as managing director (in accordance with section 201J of Corporations Acts), section 201M (effectiveness of acts by directors) positions Daisy as the director. These sections argue that an action to the company is effective and constitute directorship if done for the best interest of the company even if done against the company’s constitution or any provision of Corporations Act 2001.

    1. Conclusion

Strictly applied, Corporations Act 2001 needs Bella to exercise powers conferred upon by the Company for the benefit those powers was originally conferred. Instead, Daisy has resumed the powers conferred and the directions the company takes is shaped by her. It therefore means, under Corporations Act 2001 and other litigations, Daisy is a director of Maple Company. Furthermore, going by part 5.8A of the Corporations Act, actions as expressed by Daisy makes them liable for any breaches especially when Maple can enter into transactions aimed at contravening interest of other shareholders.

  1. Varying voting rights of family shareholders

The issue in this case is whether the meeting had the mandate; by virtue of Corporations Act 2001 or other jurisdictions remove voting rights held by family shareholders. Voting rights has been contentious issue when dealing with directors and shareholders in a company. Patterns and rights of voting by shareholders are enshrined in Corporations Act 2001. In order to distinguish facts regarding this issue, sections 246B and 246C of Corporations Act 2001 will be considered as the core rule.

    1. Application of the relevant law to the issue

Section 246B of the Corporations Act stipulates ways under which a company or directors can vary or cancel class rights of family shareholders. Before elaborating on this issue, the case explains that though the family members have family class shares, they have equal voting rights too. Subsection 2 of section 246B will be applied. This part sets that rights to vary or cancel voting rights held by the family shareholders must be done by special resolution. Such resolution must be passed at a meeting. Looking at this part vis-à-vis the law, it convinces that varying and cancellation of voting rights was valid and in accordance with the Act. However, part (d) of the subsection states that such variations and cancellations must be done with written consent on members with at least 75% of the votes in the class. Though the threshold of 75% was met (based on the proxy vote acquired) there was no written consent informing Bella, Able and the family shareholders. Furthermore, the Act also establishes that such cancellations and variations can only be if it has a share capital of the class of members holding shares in the class (see section 246B subsection 2c (ii)).

Subsequently, section 246C of the Act stipulates certain actions that need to be taken so as to vary rights held by the family shareholders. For instance, subsection (1) states that in the event of a company with share capital then the division must be taken to vary the rights that every share attach. And this must have been in the class existing before the division. In other jurisdictions, varying or cancelling voting rights held by family shareholders can be done if they express apathy (Nolan 2009). In such situations, their rights are grounds on rational apathy and thus not interested in voting. This is also applicable when there is evidence of shareholder inadequacy. That such shareholders are not able to make good decision and their voting only serves to detriment the company.

    1. Conclusion

In theory, juries are very clear regarding the value of the shareholder voting rights. As a matter of fact, franchising shareholder is the ideological underpinning upon which legitimacy of directorial power rests. Having said this, the decision made by Claude and Zac is unique and has no records in judicial proceedings. Furthermore, the decision to remove voting rights held contravenes sections 246B and 246C of Corporations Act 2001. It is worth concluding that denying or removing shareholder’s right to vote under this circumstance is prejudicial of the company and contrary to the protective purpose of the Act the company subscribes to.

  1. New Business debt insolvency

The issue in this case is that Claude and Zac have new business idea. This resolution was adopted during the meeting. As a separate branch of Maple, it is important to ascertain whether under Corporations Act 2001, Zac, Claude and even Able will be liable for debt insolvency incurred by the new business. Relevant rules that will help ascertain the extent these shareholders may be liable for the debt insolvency include section 588G (1) and (2), subsection 95A (1), 206D and 254V.

    1. Application of the relevant law to the issue

An important factor in this case is that prior to voting process that ultimately resolved to adopt the idea; Daisy told Bella that the cash flow of the company was very tight. This information gives probability of the company becoming insolvent. Basing from this point subsection 95A (1) define solvency and insolvency.7 Therefore if the plan is adopted, Zac, Claude and even Able (who willingly allowed proxy vote) will have the duty to ensure that the newly established branch remains stable. Duties owed to the three directors to prevent insolvent trading are enshrined in section 588G (1) and (2). In managing the new branch (see section 1.7) the three directors will also be obliged to prevent the company trading while it is unable to pay its debts (see section 5.3…duties and liabilities of directors). How does law provides for the three directors to prevent insolvent trading of the new branch? First, the three will be directors at the time the new venture may incur debt (see section 588G (1) (a)). Therefore, if they will fail to act according to section 1.7 then they will be contravening section 588G (2) (a-b). Furthermore, section 588G subsection 2 (a) states that if these directors are aware that at the time or have such grounds for so far believing or basing on the current circumstance of the company aware that the company (main branch in this case) might incur debt (see section 254V) therefore they will be liable for insolvency. The three directors do not only reasonable grounds but also know that current economic environment does not favour further expansions.

    1. Conclusion

It there remains that under the Act, if the directors will engage in the business and such incur debt leading to insolvency then they will have breached relevant sections of the Act as mentioned above (Susan 2002) . After determining damages incurred by the company (according to section 1317 (2)), the directors may be liable for compensation for the losses the company incurs according to section 5.3.

  1. Bibliography

Andrew, L Mackenzie, (1999). A company Director’s Obligations of Care and Skill. The

journal of systems and software, 81(1), pp. 2118-2133

Company Law Review (2003). Modern Company Law for a Competitive Economy. DTI, p.1.

Law project organizational journal, 2 (1), pp. 85-96.

Modern Company Law (2004), Competitive Economy: The Strategic Framework. URN 99/654. The Strategic Framework

Nolan, R. Collons (2009), Controlling fiduciary power”, Cambridge Law Journal. University of Helsinki.

Susan, P. Barber, (2003). Company Law (3rd ed., Old Bailey Press, London). University of Helsinki.

1
Section 308 of the UK Companies Act 1985

2
UK Companies Act 2006, sections 215 and 217.

3
Victorian Stevedoring and General Contracting Co Pty Ltd

4
See section 248F…Unless the directors determine otherwise, the quorum for a directors’ meeting is two directors and the quorum must be present at all times. For special quorum rules for public companies, see s195.

5
The features that form the basis of the conclusion are set out in Precision Data (1991)173 CLR 167 at 190–1 (the Court)

6
See Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286

7
A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable. A person who is not solvent is insolvent.