Issues with the Corporations Act 2001 

  • Whether the constitution of the company is as per the Corporations Act,2001
  • Whether the resolution passed at AGM is valid.
  • Can the onus be put on Ludwig?
  • Can the court interfere in such matter?
  • The main issue that arises is whether Teresa have conducted an illegal act for which she must be held liable for the civil or criminal charges under the Corporation’s Act

Corporations Act 2001 - Rule 

  • Corporations Act, 2001

  • Common-Law

Corporations Act 2001 - Brief facts

Teresa, Robert, Clara, Johann are musicians. They incorporated a business JRCT musical pty ltd under ASIC guidelines to teach music. They are the only directors and shareholders of the company with each having one share, with one voting right in the annual general meeting of the company. There are two articles in the company: Art 1 the business of the company be managed by the directors and Art 2 saying that the company shall not contract more than $5000 unless a resolution passed in contradiction of the same. Teresa was appointed as CEO of the company at the first annual meeting. Ludwig, a worker of a musical instrument warehouse, was a friend of Teresa. Knowing Teresa position at JRCT, he told her that he wants to sell a Baby Grand Piano which would be an asset for her company. So, he drafted a sale agreement of $10,000 to which Teresa gave him her business card and told to discuss the matter with her directors at the next general meeting. Teresa later sends an email to all her directors about the timing, the location, the purpose of the meeting along with the attached copy of the sale agreement, to which Clara and Johann refused to come at such a short notice and asked to reschedule it.

Robert was the only director present to attend the meeting and he voted in favour of the resolution. Knowing the fact that a resolution should be passed by at least two directors present at the meeting, she signed the resolution on behalf of Robert too. She then handed over the signed contract to Ludwig to which he got sceptical about that as how on such short notice did Teresa managed to pass the contract even though the sale agreement was beyond the limit of the constitution of the company. But he didn’t act on his gut and accepted the contract. Clara and Johann showed their displeasure on the acts of Teresa and Robert and demanded to rescind the offer as they felt the location of the meeting was inappropriate. Robert too favoured Clara and Johann. Ludwig then threatens legal implication on the company for rescinding the contract.

Corporations Act 2001 - Application

The Corporations Act, 2001 (hereinafter referred to as, Cth) is an elucidated document comprising the company law of Australia. The given facts show that Teresa did not commit any misconduct and that she acted in good faith of the company. She abided by the set standards which a director of a company should follow.

Dealing with the first issue, in the constitution of the company, the mention of only two articles in very vague and does not give legal recognition to the company in the eyes of law. S125CA says that the constitution of the company must set out the limits of the powers and its objects too. Hence the constitution of the company should have mentioned about the limitation of powers of directors, the legal implication of breach of it. Clause (2) of the given section states that merely an act of a company is not invalid if done contrary to the objects in the constitution. In Lion Nathan Australia Pty Ltd v Coopers Brewery Limited (2006) 59 ACSR 444, the Full Federal Court gave guidelines on the constitution of the company:

1. It is a kind of commercial contract and should unravel agenda behind the formation of the business.

2. Like any other commercial contracts, they should be read as a whole.

3. Not only the text, but importance should be given to the circumstances known to the parties, the purpose and its object. So was held in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 and Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165.

4. The principles of the contract apply to the constitution of the company too.

The second issue on the validity of the meeting conducted, “s248C-248GCA” shows that any director of the company can call for the meeting and there is such requirement of adequate place or location required, which was asserted by Clara and Johann. For a resolution to be passed, more than one director should be present and consent with the resolution. So when Robert gave his consent and left the place, Teresa, under this impression signed the resolution in his name too since she never thought that consent to be disputed. The question about the legality of the place where the meeting was conducted, is also undisputed. The CEO has the right to conduct meeting anywhere he likes, else otherwise given in the constitution of the company. The constitution of the company is silent about it so Teresa is not bound to conduct the meeting as per everyone’s directions.

Also, she intimidated all the directors legally, what the statute requires her to do. She emailed all of them about the agenda, the timing and the location of the meeting because of which Robert appeared too. It was Clara and Johann personal choice to not show up at the meeting but that cannot make the meeting unconstitutional. In a leading case, Summerdowns Rail Ltd v Stevens [2015] NSWSC 321, the Supreme court of New South Wales held if the director of the company failed to give notice of the meeting to the other directors of his company, so that cannot be the ground of revocation of the resolution. There are some exceptions given to it that due to some bad means of communication or the director is overseas and more (Lexology, 2015).

For the third issue, whether Ludwig could be held liable for not acting in good faith, so yes, he could be held liable. Since the whole Australian law on not a codified law and based on common law principles, hence the doctrine of caveat emptor is fully applicable here (Mondaq, 2015). Reason being, Ludwig knew that there was something suspicious with the general meeting conducted, instead, he did not clarify that and focused on his benefit. There was malicious intent behind accepting the contract. Not to forget, when Teresa told him about the limitation of the contract JRCT can make (i.e., $,5000), he offered $10,000 of the sale of Baby Grand Piano, to which Teresa said to discuss the matter with her directors first and then give a definite answer. He wanted to have leverage over the kind of relationship he had with Teresa and it clearly shows his greed for benefitting. In a case, Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd [1989] 2 NSWLR 309, the Supreme Court of South Wales (with Hope JJA, Mahoney JJA, McHugh JJA) drew a line between subjective and objective contracts. Justice Mahoney gave the judgement through an example.

Like if A agrees to sell black acre to B for $100 and B agrees to buy that, so it's a valid contract even though made orally. So, law shall consider it a contract even though both or either of the parties does not intend so to do. Subjective intention shall arise in that scenario when B knows that A was just pretending to have a contract, then the court shall not impose a legal obligation on A for breach of contract. If otherwise, then shall. Justice MC Hugh explained the objective theory of contract. He did not believe in the subjective theory of contract and gave more weightage to his theory. He said that a court should look into the relationship between the parties and not on their wordings. If anyone as a joke said anything about making a contract, that does not become a valid contract. Hence, intention cannot be proved by the document, but the relationship two parties hold. Where there are chances of having a fiduciary relationship, then the intention of the parties is given cognizance.

The fourth issue, on the interference of the court, it has been held in Carlen v Drury (1815) 35 ER 61 that when a matter related to the internal conflict between the management of the company, the court cannot interfere in that. It will only interfere if the court feels that it is a case of ‘Breach of Engagement’ or ‘Abuse of Trust’ is established 'to the perfect satisfaction of the Court.’ (Plessis, 2016). It is a matter relating to the objectivity of the case but if one looks into the facts, then there could be seen the thing that could fall under the exception category. Therefore, the issue among the four directors could be solved through inner management models.

The fifth issue, the conclusion of the problem, whether Teresa is liable under Cth. Scrutinizing all the given regulations applied on the problem, it clearly shows that she did whatever she could under her capacity as the CEO and that she never explicitly accepted Ludwig’s offer. She handed to him her business card and asked for some time to discuss the matter with her other directors to which he agreed too. About the allegations on her about the conduct of the meeting, so she never did anything wrong as per Cth. She is free to choose any location she wants for the meeting. The major loophole in their company was the constitution. They haven’t mentioned anything in it about the quorum, about the minimum period required for intimidation to other directors about the meeting, etc. This is the reason why Clara, Johann are at a most disadvantaged position because they don’t have any concrete evidence to back themselves. Teresa did everything legally by sending them emails about the meeting and then calling them personally about the location and timings of it. Even though they refused to come, the meeting conducted by her had her and Robert, which was sufficient to contribute 50% of the quorum requirement for any resolution to get passed as per the act. Therefore, she cannot be facing any civil or criminal charges for what she did and that there was never a contract between Ludwig and her, so he too can’t sue her.

Conclusion on Law of Business Organisations

With the application of the regulations in the given problem, it is clear that Teresa did her act in good faith of her company and that she did not commit any fraud. Her friend, Ludwig wanted to have an undue advantage with the relationship he had with her, because of which he tried to bait her. Her directors too did not support her even though she was working in the best interest of the company. They did attend the meeting and then later filed accusations of the fraud she committed of holding that meeting at her place, whilst nothing was given in their constitution of the company. The major fault of there was that they have kept their constitution silent. It is very ambiguous because the general requirements of mentioning about the duties and responsibility of a CEO, its limitation, duties of the directors, about the conduct of meetings, etc nothing of that sort was given. That generated ambiguity in the minds of the readers and makes it hard to judge which action could be taken as legal or illegal. Therefore, with the help of the act, a lot of those ambiguities got solved and concluded that Teresa is innocent.

References for Law of Business Organisations

Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd [1989] 2 NSWLR 309

Carlen v Drury (1815) 35 ER 61

Lexology. (2015). When will no notice constitute reasonable notice of a directors’ meeting?

Lion Nathan Australia Pty Ltd v Coopers Brewery Limited (2006) 59 ACSR 444.

Mondaq. (2015). Australia: The statutory contract addisons contractual interpretation series. 

Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451.

Plessis, J.D. (2016). Revisting the judge-made rule of non-interference in the internal company matters. The South African Law Journal, 304-327.

Summerdowns Rail Ltd v Stevens [2015] NSWSC 321

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Law Assignment Help

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