Australian Corporate Law

This article discusses two questions related to Australian Corporate Law. The first question deals with preventing the inclusion of a new clause in the company constitution and providing recourse to a supplier for non-payment. The second question deals with advising on the breach of duties by directors and the penalties and remedies applicable. The article also provides advice on taking action against a director based on their duty.

Australian Corporate Law
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Table of Contents
QUESTION 1.............................................................................................................................3
A. Company constitution and advice to Salman to prevent the inclusion of new clause to
change the constitution...........................................................................................................3
B. Providing recourse to Melanie for non payment of contractual monthly payment...........4
QUESTION 2.............................................................................................................................5
A: Advising Archibald whether the directors of Chip-Eze Pty Ltd have breached s181 of
the Corporations Act 2001 (Cth) or their equivalent equitable duties and what penalties or
remedies might be applicable.................................................................................................5
B. Advice to Faizah in taking action against Jordon on the basis of the director’s duty.......7
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QUESTION 1
A. Company constitution and advice to Salman to prevent the inclusion of new
clause to change the constitution
In the first case the company, Astounding Gifts Pty Ltd, changed their company constitution
which led to discretionary purchase of 10% shareholding of Salman by the company. This
part of the assignment would try to advise Salman in preventing the new clause inclusion for
the prevention of the shares expropriation. The directors of the company, Kody and Ryder,
decided that they would provide 10% shares of the company to Salman through the
employment contract. Later they found out that Salman has also accepted a position as
accountant in the rival company Incredible Gifts Pty Ltd. The directors also had the
information that Salman has also tried to persuade Melanie, supplier of handmade gift, for the
Incredible Gifts Pty Ltd. Previously Astounding Gifts Pty Ltd got into a contract with
Melanie to supply the products against a monthly payment of $5000.
The advice would first discuss the constitution change process in a business organisation. In
the business legal term a constitution is the contract between director and company, member
and company, company secretary and company, each other member and a particular member.
The legal requirement is that a company can go for adoption of a constitution before or after
of the business registration process. There is two separate approach of the constitution
adoption process. Before the registration process the member must in writing agree to the
constitution’s terms whereas after the registration the adoption process would be done
through a special resolution. All these approach of constitution adoption is done as per the
‘Corporations Act 2001’1. This law again state the detailed procedure of changing the
constitution. This repealing or changing of the constitution is done through the same special
resolution process. In this case the special resolution must have a notice period of 21 days
and 28 days for the general companies and public limited company respectively2. After this
process the voting procedure is discussed in this act and there it is stated that 2/3 majority in
favour of the resolution would be required for the adoption of the resolution.
1 Bosch, H. (2002). The changing face of corporate governance. UNSWLJ, 25, 270.
2 Davis, G. (2003). A contract state? New public management in Australia. In New public service (pp. 177-197).
Gabler Verlag, Wiesbaden.
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In the current context of Astounding Gifts Pty Ltd the resolution has been passed in hurry and
no mention of prior notice of 21 days is visible. This could be the main objection that can be
put forward to prevent the inclusion of the less than 12% shareholding status expropriation.
This would prevent the implementation of this clause immediately and would ask for due
procedure to be followed for this procedure. At that time the next crucial argument for
defence would be the 2/3 or the 75% voting in favour of the resolution3. At the moment the
passing of the resolution does not show the required 75% mandatory in favour votes. Inability
to have 75% vote in favour of this resolution would mean that the current resolution would
not be adopted.
B. Providing recourse to Melanie for non payment of contractual monthly
payment
In the current case of Melanie, a duly signed contract was made where Melanie supposes to
provide certain handmade gift or crafts to the Astounding Gifts Pty Ltd and in return they
would provide $5000 to Melanie every month. Melanie stated the supply process for the
Astounding Gifts Pty Ltd. Meanwhile Astounding Gifts Pty Ltd was approached by the
Incredible Gifts Pty Ltd for the same supplies. After this incident Astounding Gifts stopped
their payment to Melanie.
Considering the situation of Melanie, the situation can be viewed as the actual breach of
contract. As per the actual breach of contract, when a party does not intentionally stop
performing their side of duty as time comes through the other side has been able to fulfil
their side of agreement. This common form of breach of contract can have different legal
remedy to be given. One of the simple approaches that can probably solve the situation for
Melanie is the direct sorting process of the problem with the appropriate authority of
Astounding Gifts Pty Ltd4. In this approach Melanie can approach the director of Astounding
Gifts Pty Ltd to resolve the situation and ask them to fulfil their contract agreement. The
reasonable arguments under this approach can have proper resolution. But there are situations
when the problem is not resolved under this approach.
3 Salacuse, J. W. (2013). The three laws of international investment: national, contractual, and international
frameworks for foreign capital. Oxford University Press.
4 McKendrick, E., and Liu, Q. (2015). Contract Law: Australian Edition. Macmillan International Higher
Education.
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Under this type of cases the company must provide proper oral and written explanation for
this incident. But from Astounding Gifts Pty Ltd, Melanie did not receive any explanation for
the stop of payment. In the current situation the actual breach of contract is quite visible. One
of the recourse for the current breach of contract is the damages provision. Melanie under the
current circumstances can demand for the mental harassment from this situation. Melanie can
avail the option of ‘liquidation claims’5. Here certain sum of money must be agreed upon
signing the contract to be payable if any party breaches the contract. If such clause was there
in the contract Melanie can certainly ask for that.
QUESTION 2
A: Advising Archibald whether the directors of Chip-Eze Pty Ltd have breached
s181 of the Corporations Act 2001 (Cth) or their equivalent equitable duties and
what penalties or remedies might be applicable
According to the Section 181 of the Corporations Act of 2001 any director or manager of an
organisation or business establishment must discharge their duties and responsibilities in a
good faith which would act in the best interests of the corporation and at the same time must
be for a proper cause or purpose. The aspect of good faith has been given the highest levels of
importance within the law as it helps in ensuring there is more accountability among the
managers and directors of an organisation. The managers must not have any material personal
interest in the subject matter of the business decision making and they must inform
themselves about the subject matter of the judgment to the extent that they reasonably believe
to be appropriate6. The directors and managers must also believe that their decisions are in
the best interest of their organisation.
From the case scenario given before us, it can be seen that the directors of Chip-Eze Pty Ltd.
has taken a logical and rational decision which was in the best interest of their organisation.
Chip-Eze Pty Ltd was already having a lot of financial difficulties and they have been unable
to make payments to their creditors who were mainly the suppliers those who were involved
5 McKendrick, E., and Liu, Q. (2015). Contract Law: Australian Edition. Macmillan International Higher
Education.
6 Middleton, T. (2003). The difficulties of applying civil evidence and procedure rules in ASIC's civil penalty
proceedings under the Corporations Act. Company and Securities Law Journal, 21, 507-529.
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with the snack food side of their business. The company was not doing well in their business
for quite some time. Their business was divided into two segments – one involved the
manufacturing of potato crisps and other snack foods (which was the loss making segment of
their business) while the other involved the manufacturing of frozen potato chips and other
foods (which was doing reasonably well in the market and was earning the necessary profits
for ensuring the normal sustainability of their business. So, the management organised a
board meeting on 1st August, 2018 where Michaela proposed to create a separate company by
the name of Freeze Me Pty Ltd wherein the profitable frozen foods section of their business
would be completely transferred. This proposal was readily accepted by the board members
and passed unanimously. Freeze Me Pty Ltd was incorporated on 10th August, 2018 and all
the assets of the frozen foods division of Chip-Eze Pty Ltd were transferred to this company.
The directors demonstrated a high amount of responsibility by clearly informing about the
changes to their customers and suppliers. But the creditors of Chip-Eze Pty Ltd had not been
duly paid by the organisation before the management decided to switch over their business to
Freeze Me Pty Ltd. Therein lies the fault of the managers which clearly demonstrates the lack
of accountability and responsibility towards their creditors. This clearly points to a breach of
the duties of mangers under Section 181 of the Corporations Act of 2001 (Cth) and as a result
the company is liable to pay a penalty or compensation to their creditors who have not been
paid their dues7.
Section 181 of the Corporations Act of 2001 clearly mentions the aspect of
managers exercising their powers and discharging their duties in good faith which would be
in the best interest of the organisation but cheating the creditors would not provide a good
name to the organisation and it would invariably tarnish and compromise the brand image
and reputation of Chip-Eze Pty Ltd in the market. Thus, it can be concluded without any
doubt that the managers have failed to carry out their duties in a responsible manner and as a
result the managers of Chip-Eze Pty Ltd are liable to face penalties.
The fact that the breach of the duties and obligations of the managers under section 181 of the
Corporations Act of 2001 gives rise to civil obligations so it would also invite civil penalties8.
The provisions of the civil penalties would invariably be decided by the courts which in worst
cases can force the managers of Chip-Eze Pty Ltd to pay a monetary compensation to their
creditors which would satisfactorily cover for their losses. The Corporations Act 2001 also
7 Sheenan, K., & Fenwick, C. (2008). Seven: The Corporations Act 2001 (Cth), corporate governance and
termination payments to senior employees. Melb. UL Rev., 32, 199.
8 Tomasic, R., Bottomley, S., & McQueen, R. (2002). Corporations law in Australia. Federation Press.
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sets out criminal offences in those cases where a director has been found to act in a reckless
and irresponsible manner or is found to act in a dishonest manner deliberately resulting in
their failure to exercise their powers and duties; they are liable to face criminal prosecution
for their actions.
B. Advice to Faizah in taking action against Jordon on the basis of the director’s
duty
In the current context the case it can be seen that Faizah showed her interest to buy additional
shares in the Chip-Eze Pty Ltd. Jordon being one of the directors of the business agreed to
sell 5% of the company shares to Faizah. The transaction was completed but after some time
the inability of the Chip-Eze Pty Ltd to repay the creditors lead to insolvency of the company
by the order of the court. Under this situation one case could be the withholding of facts from
Faizah by Jordon which led to loos for Faizah.
The s181 of the Corporations Act 2001 (Cth), can be a support in this situation. As per this
act there are certain duties for the directors to be followed at the time of work9. The law
clearly stated that the director needs to fulfil certain duty while making some judgement
regarding the business. One of the duties is the proper purpose and good faith at the time of
making some important judgement for the business. The duty further states that the
judgement made by the directors should not have the self interest related with the situation.
The directors from their reasonable believe point must inform them about the time of
judgement regarding the subject matter. The judgement of the director must have a belief
from the directors that the decision would be best interest for the company. These are the
formal duties that are explained in the legislation. But additionally there could be some other
duties also for the directors. The directors at the time of fulfilling their duty must not engage
in any capacity that may lead to person advantage or other advantage or a detrimental
situation for the company. This duty comes under the s182. Then in the s183 the legislation
also states that the directors must not use the information obtained just by being in a
advantage position in the organisation, for person advantage or other advantage or a
detrimental situation for the company10.
9 Bosch, H. (2002). The changing face of corporate governance. UNSWLJ, 25, 270.
10 Bosch, H. (2002). The changing face of corporate governance. UNSWLJ, 25, 270.
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These duties provide some opportunity for Faizah to apply the action against Jordon at the
time of share deal. One of the applicable duties under the current situation is the good faith
and proper purpose duty of the directors. Jordon being the director of the company had the
privilege to have the proper knowledge about the solvency situation of the business. At the
time of selling the shares Jordon did not showed good faith by providing the proper
information to Faizah about the business situation. The purpose was not proper here as
Jordon tried to sell off some the shares to liquidate some of his money. Here the s183 is also
applied as in the current situation where being the direct of the company Jordon had these
sensitive information about the insolvency situation of the business 11. This information were
used by Jordon to benefit himself and quickly took the offer of Faizah and sold 5% shares.
This act in his personal interest is totally against the director’s duty.
Under this situation Faizah have the right to ask for penalty Jordon. The civil penalty
provision of the legislation states that. Under the part 9.4B the pecuniary penalty of $200000
can be demanded or may be asked to compensate for the loss that has been incurred by
Faizah because of this information withholding12.
11 Oliver, P. (2013). Incorporated legal practices: ILPs by the rules: Statutory and regulatory obligations for
incorporated legal practices and legal practitioner directors. Proctor, The, 33(6), 46.
12 Redmond, P. (2012). Directors' duties and corporate social responsiveness. UNSWLJ, 35, 317.
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References
Bosch, H. (2002). The changing face of corporate governance. UNSWLJ, 25, 270.
Davis, G. (2003). A contract state? New public management in Australia. In New public
service (pp. 177-197). Gabler Verlag, Wiesbaden.
McKendrick, E., and Liu, Q. (2015). Contract Law: Australian Edition. Macmillan
International Higher Education.
Middleton, T. (2003). The difficulties of applying civil evidence and procedure rules in
ASIC's civil penalty proceedings under the Corporations Act. Company and Securities Law
Journal, 21, 507-529.
Oliver, P. (2013). Incorporated legal practices: ILPs by the rules: Statutory and regulatory
obligations for incorporated legal practices and legal practitioner directors. Proctor,
The, 33(6), 46.
Redmond, P. (2012). Directors' duties and corporate social responsiveness. UNSWLJ, 35,
317.
Salacuse, J. W. (2013). The three laws of international investment: national, contractual, and
international frameworks for foreign capital. Oxford University Press.
Sheenan, K., & Fenwick, C. (2008). Seven: The Corporations Act 2001 (Cth), corporate
governance and termination payments to senior employees. Melb. UL Rev., 32, 199.
Tomasic, R., Bottomley, S., & McQueen, R. (2002). Corporations law in Australia.
Federation Press.
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