Organisation law Essay Example

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COMPANY LAW 8

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In this part, the paper will discuss whether or not any of the directors of Nurture Nature Pty Ltd have breached any of their directors’ duties. The answer to this part will depend upon the interpretation of the actions on the part of the directors in relationship to the general duties that have been imposed upon on the directors of companies in Sections 180-183 of the Corporations Act
2001 (Cth).1 These provisions have been derived from numerous decided law cases which can be applied to the facts of the present situation.2

If the directors of Nurture Nature Pty Ltd have disregard these sections of the Corporations Act
2001 (Cth), they will be liable to civil actions by the shareholders under Part 2F of the Act and/or civil penalties pursued by the Australian securities and Investments Commission (ASIC).3 In this part, the paper will deal with the directors by considering separately the position of Yolande, Shani, and Wei generally. Lastly, the paper will consider the possible remedy for other shareholders in the company who wishes to take action on the three directors.

  1. Yolande and Shani Position

    1. Have Yolande and Shani contravened Section 181

Section 181 of the Corporations Act
2001 (Cth) requires the directors, including Yolande and Shani, to act for “proper purposes or in good faith and in their interest of the company, and (here Nurture Nature Pty Ltd)”. It has been seen the two directors have not done so in complying with all the three requirements that have been set out in Section 181. Both Yolande and Shani should explain how they have discharged a significant conflict of interest. In Re Enterprise Gold Mines NL (1991) 3 ACSR 531 at 539,4this was the question that was asked by Appellant Court sitting in West Australia in relation to the liability of the directors in this case. The conflict of interest arises because both Yolande and Shani as the Managing Director and Financial Directors of the Nurture Nature Pty Ltd are also the owners of Outside Life Pty Ltd, a supplying company. They therefore stand to benefit financially if the Outside Life Pty Ltd start supplying camping equipments. Regal Hasting vs. Gulliver case makes it clear that directors such as Yolande and Shani should be called upon to account for the benefits they receives personally as a director of Nurture Nature Pty Ltd.5

    1. Have Yolande and Shani discharged their conflict of interest

In the case discussion, it appears they have not. There are two issues here. First, Yolande and Shani have not declared that they owned an interest in the supplying company which intended to supply the camping equipments. In early cases such as Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 case a director was required in similar situations to declare not merely the fact that he had an interest in the matte under discussion, but rather, “the full nature and extent” of that interest.6 Yolande and Shani certainly have not done this.

In the case discussion, the facts suggest Wei, non-executive Director may have known that Yolande and Shani have an interest in the supply of camping equipment. However, more recent cases such as Woolworths Ltd v Kelly (1991) 22 NSWLR 189 case make it clear that both Yolande and Shani should ensure that other directors or shareholders in a company are informed of this interest and should not assume that shareholders or directors are aware of their positions.7
In addition, Section 191 of the Corporations Act
2001 (Cth) now requiresYolande and Shani to declare the nature and extent of their interest and the two directors are strictly liable under the criminal law if they fail to declare their interests.

1.3 So, Have Yolande and Shani contravened Section 181

In the case discussion, it has appeared that both Yolande and Shani have contravened section 181 of the Act. By not reveling to the shareholders or other directors of their interest in the supply of camping equipments, the two directors have neglected their obligations under section 191 of the Act and the two directors will be criminally liable for not declaring their interest.8 On these facts however, it would be possible for the court to infer on the balance of probability that both Yolande and Shani have not acted “in good faith or in the interest of the company”.

1.4 Have Yolande and Shani contravened section 184

Section 184 of the Corporations Act
2001 (Cth) saysthat Yolande and Shani may have committed criminal offence if they have been intentionally dishonest or reckless- and failed to exercise their powers in accordance with section 181 of this Act. In the case discussion, the two directors may appears to believe that at least one of the director knew of their interest Outside Life Pty Ltd, so it is difficult to think that they were necessarily reckless or dishonest as to the consequences of their actions.

1.5 Does two directors’ contravention enabled ASIC to take civil penalty proceedings

Section 1317 of the Act says that in event of a contravention of Section 180-3, Australian securities and Investments Commission (ASIC) are required to take civil proceedings to obtain a declaration under Section 1317E against Yolande and Shani to impose a monetary penalty upon the two directors under Section 1317G and ban the two directors from managing a company within a period of time. In addition, the court may also order the two directors to pay compensation under Section 1317H of the Act.9 This course of action would be open to Australian securities and Investments Commission (ASIC) in this case discussion.

1.6 Have Yolande and Shani contravened section 180

Subsection 180(1) of the Act state that directors in companies are required to act with same care and diligence that a reasonable person would exercise if they were in the director’s position.10 Subsection 180(2) of the Act provides for a ‘business judgment rule’ which requires the directors to satisfy the requirements of section provided the two directors meets the four conditions that have been set out. a) The directors are required to make their judgment in good faith and for a proper purpose; b) directors are not required to have interest in any transaction; c) directors must inform themselves to the subject matter of the transaction; and d) the judgment should be in the best interest of the company.11

In the discussion, the two directors’ contravened section 181 of the Act, the two directors were unable to satisfy (a) (and probably (b), (c) and (d) as well). As a result the two directors will be civilly liable for Nurture Nature Pty Ltd loss.

  1. Non-executive director, Wei

This paper will consider Wei’s position under section 180 and section 181.12 The paper will adopt the same law that was stated in considering Yolande and Shani positions; it may be argued that Wei contravened section 181 of the Act. This is because he has not disclosed to the shareholders and other directors what he knows of the financial position of Yolande and Shani and Outside Life Pty Ltd. However, there is insufficient evidence to be sure of his motivation and he may be honestly holds the view that Nurture Nature Pty Ltd’s interests are best served by allowing Outside Life Pty Ltd to supply camping equipments.

Wei’s position under section 180 of the Act is a little more precarious. The law with respect to the director’s required care and diligence under this section (see 1.6). Although Jones as a director does not have any interest in awarding tender to Outside Life Pty Ltd, there is a question as to whether or not he has informed himself as to the subject matter of the supply as he apparently knows relevant information about Yolande and Shani financial position in Outside Life Pty Ltd. Wei is therefore open to possible civil liability under section 180.

Conclusion

As the consequences of their actions, (1) Yolande and Shani will be liable to civil penalty proceedings by Australian securities and Investments Commission (ASIC) under section 1317 for his contravention of section 181 and section 180.13 They will probably be liable to pay compensation. The two directors may also be criminally liable under section 184 of the Act for their breach of section 181.

However, the two directors may well be criminally liable under section 191(1A) for their failure to declare their personal interest to the other directors and shareholders.

(2) Wei will be unlikely to be held liable for any breach of section 181 but he may be civilly liable for his contravention of section 180.

The legal fiction of the separate legal entity principles enables companies to be bound by the contracts entered into with outside parties.14 However, for the company to be bound by the contract several “internal” transactions must have occurred. But if internal transactions are abused by directors or company officers, there will be some consequences for the contracts that have been entered with outsiders. Section 128–129 of the Corporations Act
2011(Cth) comprise a rule adoption of the common law rule known as the “indoor management rule” or Rule in Turquand’s case.15 This rule allows outsiders dealing with a company to make assumptions about the internal consistency of decisions made by a company with its rules.

The Indoor Management Rule was first established in the case of Royal British Bank v Turquand (1856) 6 E&B 327. In this case, the Court allowed an outsider to make the assumption that the company officer had complied with the company’s rules.16 In this case, the company’s directors had guarantee to their banker for borrowing without complying with the requirement of a shareholders’ general resolution of approval.17 The company relied on the absence of shareholder approval to avoid repaying the loan. The court rejected this argument and found the bank was entitled to assume the loan to the bank was duly authorized by the company’s shareholders.18

The Indoor Management Rule was first approved in Australia in the case of Albert Gardens (Manly) Ltd v. Mercantile Credits Ltd19

The Rule in Turquand’s case is used to strike a balance where company officer acts without authority of the company’s shareholders. In the past, this rule has been used to protect outsiders and enable them to enforce a contract against a company.20 In some cases, company officers or directors may act without authority; however this would not be apparent to an outsider even after reading the company’s constitution. A company can only enter into a binding contracts through the actions of it agent. Section 126 of the Corporations Act
2001 (Cth) provides that a company’s power to make a contract may be exercised by a person acting with authority of the company. Also, a contract may also be made with or without a company common seal. While section 127 of the Act indicates that a company may enter into a contract through its organs, usually through a board of directors or a person who represents the will and mind of the company.21 Whether or not a company is liable under a contract, for the acts of an agent or a company officer is governed by the law of agency. These principles have been modified by the Corporation Act.

In the past, the act of a company officer or its agent could only bind the company if they were stated in the company’s constitution.22 Any Acts that was outside the company’s objects was ultra vires and was not binding on the company. But Section 125 (2) of Corporations Act
2001 (Cth) state that a contract with a company will not be invalid just because it is outside its object clause. In addition, Section 125 (1) of the Act states that if the company’s constitution contains restrictions on power, the contract that has been enter by the company officer will not be invalid due to non-compliance with these restrictions.23 Nowadays, companies in Australia cannot rely on restrictions contained in their constitutions to avoid their contractual obligations.

In conclusion, Nurture NaturePty Ltd will is bound with the loan contract with A Bank Ltd. Although Mr. Wei did not have the blessing of the company’s shareholders and the company’s constitution there was a restrictive clause that no company’s director should have the capacity to bind the company to contracts worth more than $50,000 without the shareholders approval. The company will be bound to start repaying its contractual agreement entered on its behalf by its non-executive director, Mr.Wei. As stated in Section 125 (2) of Corporations Act
2001 (Cth) a contract entered on behalf of a company will not be invalid just because it is outside its object clause. In addition, the Rule in Turquand’s case prevented outsiders from being affected by internal irregularities of which they had no means of discovering.

Bibliography

Books and Journals

Baxt, Robert. ‘Company Law Reform – The Future and Fixing Up the Past – The Doctrine of

Ultra Vires’ Australian Business Law Review 19 (2012).

Bird , John. ‘The Duty of Care and the CLERP Reforms’ Company and Securities Law Journal

17: 141 (1999).

Ford, Hansen. ‘Ford’s Principles of Corporations Law’, 6th edition. (Sydney:

Butterworths,(1992).

Horrigan, Boston. Third Pärty Securities-Theory, Law and Practice’, in ‘Enforcing Securities.

(London: The Law Book Company Limited, 2000).

Lipton, Peter. Holding Out that a Person is an Officer of a Company, Company and Securities

Law Journal, 9 (2004)

Morrison, Daniel. ‘The Indoor Management Rule-A Review’, Australian Journal of Corporate

Law, 4 (2005).

Morrision, Daniel. ‘Due Inquiry and the Lender’, Australian Banking Law Bulletin, 12 (2006).

Cases and Laws

Corporations Act
2001 (Cth)

Re Enterprise Gold Mines NL (1991) 3 ACSR 531 at 539

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134

Woolworths Ltd v Kelly (1991) 22 NSWLR 189

1
Corporations Act
2001 (Cth)

2
Peter, Lipton. Holding Out that a Person is an Officer of a Company, Company and Securities Law Journal, 9 (2004), 56

3
Robert, Baxt. ‘Company Law Reform – The Future and Fixing Up the Past – The Doctrine of Ultra Vires’ Australian Business Law Review 19 (2012), 23

4
Re Enterprise Gold Mines NL (1991) 3 ACSR 531 at 539

6
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134

7
Woolworths Ltd v Kelly (1991) 22 NSWLR 189

8
Robert, Baxt. ‘Company Law Reform – The Future and Fixing Up the Past – The Doctrine of Ultra Vires’ Australian Business Law Review 19 (2012), 26

9
Robert, Baxt. ‘Company Law Reform – The Future and Fixing Up the Past – The Doctrine of Ultra Vires’ Australian Business Law Review 19 (2012), 25

10
Peter, Lipton. Holding Out that a Person is an Officer of a Company, Company and Securities Law Journal, 9 (2004), 57

11
Hansen, Ford. ‘Ford’s Principles of Corporations Law’, 6th edition. (Sydney: Butterworths,(1992), 24

12
Peter, Lipton. Holding Out that a Person is an Officer of a Company, Company and Securities Law Journal, 9 (2004), 57

13
Daniel, Morrison. ‘The Indoor Management Rule-A Review’, Australian Journal of Corporate Law, 4 (2005), 24

14
John, Bird. ‘The Duty of Care and the CLERP Reforms’ Company and Securities Law Journal 17: 141 (1999), 23

15
Robert, Baxt. ‘Company Law Reform – The Future and Fixing Up the Past – The Doctrine of Ultra Vires’ Australian Business Law Review 19 (2012), 27

16
John, Bird. ‘The Duty of Care and the CLERP Reforms’ Company and Securities Law Journal 17: 141 (1999), 26

17
Hansen, Ford. ‘Ford’s Principles of Corporations Law’, 6th edition. (Sydney: Butterworths,(1992), 25

18
Daniel, Morrision. ‘Due Inquiry and the Lender’, Australian Banking Law Bulletin, 12 (2006), 23

19

Daniel, Morrison,. ‘The Indoor Management Rule-A Review’, Australian Journal of Corporate Law, 4 (2005), 26

20

Daniel, Morrison,. ‘The Indoor Management Rule-A Review’, Australian Journal of Corporate Law, 4 (2005), 27

21
Robert, Baxt. ‘Company Law Reform – The Future and Fixing Up the Past – The Doctrine of Ultra Vires’ Australian Business Law Review 19 (2012), 28

22
Hansen, Ford. ‘Ford’s Principles of Corporations Law’, 6th edition. (Sydney: Butterworths,(1992), 26

23
John, Bird. ‘The Duty of Care and the CLERP Reforms’ Company and Securities Law Journal 17: 141 (1999), 27