Commercial and Corporations Law Study Material with Solved Assignments

This study material covers the legal obligations of directors, exclusion clauses, and more in Commercial and Corporations Law. It includes solved assignments, essays, dissertations, and more. Learn about the business judgment rule, breach of directors' duties, and other important topics.

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Commercial and Corporations Law
LEGL601
23-Apr-18
(Student Details: )

Commercial and Corporations Law
Question 1
Issue
Whether Mike would be able to take action against Mike’s Auto for the damage caused to his
car, based on the clauses provided under the invoice, or not?
Rule
Under the common law, particularly in context of the contract law, a substantial rule of law
relates to exclusion clause. Exclusion clause is such a clause, which is inserted in the contract,
and which has the ability of restricting the liability of one party, in case of certain events1. Where
the exclusion clauses are legal, for the reasons of being properly inserted in the contract, and
being legal, the party inserting the exclusion clause is safeguarded from the liability arising on
certain occurrences. It is crucial to note that the exclusion clause is invalid, where it restricts or
limits the applicability of any law. As stated earlier, it is important to properly incorporate the
exclusion clause in the contract, for it to be valid2.
Any party, which attempts to rely on exclusion clause, needs to show that a reasonable notice
had been given to the other party, regarding the presence of exclusion clause. In other words, it
needs to be shown that reasonable steps had been undertaken to bring the exclusion clause to
the notice of the other party. In Spurling v Bradshaw3, the exclusion clause was deemed to be
incorporated based on the previous dealings. In this case, the defendant used the services of
warehouse on regular basis, and signed invoice covering the exclusion clauses each time. Upon
the damages to orange juice, a claim was brought in context of exclusion clause not being
incorporated, but this claim was rejected by the court. This resulted in defendant being denied a
right of claiming compensation for the damage.
Application
The present case has an invoice being signed every time the services of Mike’s Auto are taken
up by John and every time John being given with an invoice covering exclusion clause. This
clause safeguarded Mike’s Auto from damage or loss to cars of customers by any mode. There
is a similarity being the present case and the precedent set through Spurling v Bradshaw. So,
the ruling of the former can be applied in the present case study. For the exclusion clause to be
1 Paul Latimer, Australian Business Law 2012 (CCH Australia Limited, 31st ed., 2012)
2 Ewan McKendrick and Qiao Liu, Contract Law: Australian Edition (Palgrave Macmillan, 2015)
3 [1956] 1 WLR 461
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Commercial and Corporations Law
valid, it needs to be shown that it was properly incorporated. Based on the quoted case, the
exclusion clause would be deemed to have been incorporated based on previous dealings. This
means that the loss of GPS navigation system or the accident caused by manager of Mike’s
Auto cannot be claimed upon Mike’s Auto due to the correct incorporation of exclusion clause.
Conclusion
Hence, based on the incorporation clause being properly incorporated based on previous
dealings, Mike’s Auto would not be liable for the damages caused to John’s car, based on the
operation of exclusion clause, which protects Mike’s Auto from loss caused to customer’s cars.
Question 2
Issue
Whether Peter, David, John and Lynette would be able to use the defence covered under
section 180(2) of the Corporations Act, or would they be made liable for contravention of section
180(1) of the Corporations Act?
Rule
The Corporations Act, 20014 puts certain duties and obligations on the directors of the
companies. One of such sections, covering these duties, is section 180. As per this section, the
directors have a civil obligation of using their powers, and fulfilling their duties, based on a
degree of care and a degree of diligence, which would be exercised by a reasonable person,
where such a reasonable person would have held the office of the director in similar situation
and had the same responsibilities as the director of the company5. Where the provisions of this
section are breached, the civil penalties covered under section 1317E are contravened6.
This section not only provides the criteria which would lead to breach of duty of care and
diligence, but also presents the directors with a defence, referred to as the business judgment
rule. As per this section, the director of the company would be deemed to have complied with
the provisions covered under subsection 1 of this section, based on business judgment rule,
where the following conditions are fulfilled:
The director makes the judgement for a proper purpose and in good faith,
4 Corporations Act, 2001 (Cth)
5 Corporations Act 2001, s180(1)
6 Corporations Act 2001, s1317E
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Commercial and Corporations Law
The director does not have any material personal interest in the judgment’s subject
matter,
The director has informed themselves regarding the judgment’s subject matter to such
an extent that they believe it to be proper and suitable, and
The directors rationally believe that the judgment being undertaken is in best interest of
the company7.
Application
In the present instance, the directors of Australian Motor Corporation, i.e. Peter, David, John
and Lynette, have a case being initiated against them by the ASIC for contravention of section
180(1). The directors were provided with advice of internal and external auditors on the financial
statements of the company. Instead of doing through these financial statements themselves in
proper detail, they merely relied on the advice of the internal and external auditors and believed
that the financial statements were true and correct. No attempts were made or efforts were put
in by the four directors in checking that the provided financial statements were indeed correct.
The business judgment defence is available only when the directors inform themselves on the
judgment’s subject matter, instead of putting in blind faith on the information being provided to
them. A reasonable director, holding their position, having same responsibility, and facing same
situation, would have carefully analysed the information. They would have raised questions or
cross referenced the matter provided to them, to check the authenticity of the advice provided
by the internal and external auditors of the company. By not doing so, section 180(1) was
breached, and the failure of not informing themselves on this matter resulted in the business
judgment rule not being available to them.
Conclusion
Hence, based on the present scenario, the four directors of Australian Motor Corporation, i.e.
Peter, David, John and Lynette, would be held to have contravened section 180(1) and the lack
of informing themselves regarding the judgment’s subject matter would result in defence present
under section 180(2) not being available to the directors.
7 Corporations Act 2001, s180(2)
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Commercial and Corporations Law
Question 3
Issue
Whether the issuance of special category of shares to Cleo would be deemed as a breach of
duty of Paul as is covered under section 181 of the Corporations Act, or not?
Rule
Under section 181 of the Corporations Act, another duty has been laid down for the directors of
the company. As per this section, the directors have a civil obligation of working for a proper
purpose, in good faith and in the best interest of the company8. Where the provisions of this
section are not fulfilled, the civil penalty provisions, as are covered under section 1317E
become applicable9. It is important to note here that the directors have to refrain from working
for an improper purpose. This includes both taking advantage for self10, or for defeating the
existing shareholders’ voting power by new majority being created11.
In Howard-Smith v Ampol Petroleum Ltd12, the court held that the directors had abused the
powers given to them, where they acted out in a manner where the objective was of defeating
the voting power of the already present shareholders by forming a new majority through new
shares being issued. This was seen as steps taken against the best interest of the company as
a whole, and was deemed as breach of directors’ duties. Similar ruling was given in Punt v
Symons & Co Ltd13, where the directors were held to have abused their powers by issuing new
shares to secure passing of shares, as it was seen as act done in person interest, instead of an
act done in interest of the company.
Application
In the present instance, the sole purpose of issuance of special category of shares by Paul to
Cleo was to take away the power from the hands of “B” class shareholders and give it to Cleo
upon his death. This was not in the best interest of the company, and was instead done keeping
in view the best interest of Cleo, as a result of Paul marrying on Cleo and getting attached to
her. As a result of this, the interest of the already present shareholders was maligned. Applying
the ruling given under Howard-Smith v Ampol Petroleum Ltd, this would be deemed as an
abuse of powers by Paul as he acted out in a manner where the objective was of defeating the
8 Corporations Act 2001, s181
9 Corporations Act 2001, s1317E
10 Mills v Mills (1938) 60 CLR 150 at 185
11 Comptroller of Stamps v Howard-Smith (1936) 54 CLR 614
12 [1974] AC 821
13 (1903) 2 Ch 506
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Commercial and Corporations Law
voting power of the already present shareholders, by forming a new majority through new
shares being issued. Based on Punt v Symons & Co Ltd, this would be seen as an act
undertaken in Cleo’s or Paul’s best interest, instead of an act done in interest of the company.
Conclusion
Hence, based on the present scenario, the issuance of special category of shares to Cleo would
be deemed as a breach of duty of Paul as is covered under section 181 of the Corporations Act.
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Commercial and Corporations Law
Bibliography
Articles/ Books/ Journals
Latimer P, Australian Business Law 2012 (CCH Australia Limited, 31st ed., 2012)
McKendrick E, and Liu Q, Contract Law: Australian Edition (Palgrave Macmillan, 2015)
Cases
Comptroller of Stamps v Howard-Smith (1936) 54 CLR 614
Howard-Smith v Ampol Petroleum Ltd [1974] AC 821
Mills v Mills (1938) 60 CLR 150
Punt v Symons & Co Ltd (1903) 2 Ch 506
Spurling v Bradshaw [1956] 1 WLR 461
Legislations
Corporations Act, 2001 (Cth)
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