Law of Business Associations: Advising on Contractual Obligations and Fiduciary Duties

This article provides legal advice on contractual obligations and fiduciary duties in the context of business associations. It discusses the legal obligations of a managing director in a corporation, breach of agreement of the object's clause in a constitution, and the duties of directors in a subsidiary company. The article also provides advice on how to approach these issues.

Law of Business
LAW OF BUSINESS ASSOCIATIONS
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Table of Contents
Question 1: Advise Miles and Patricia.......................................................................................3
Whether AS is bound by the contract with Build Em Architects...........................................3
Whether Coral can enforce the clause in the constitution appointing her as company
solicitor...................................................................................................................................5
Question 2: Advise Bethany and Chris......................................................................................6
Whether the director of Great games have breached s181 of the Corporations Act 2001.....6
Equivalent equitable duties to Great Adventures Ltd.............................................................7
References..................................................................................................................................9
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Question 1: Advise Miles and Patricia
Whether AS is bound by the contract with Build Em Architects
If Leighton has exceeded his authority
By the case study, Leighton appears to be appointed as the managing director of AS in 1st of
January, 2015 and this designation needs to be renewed and reapproved by the board of
directors if the designated person (i.e., Leighton) wish to exercise his/her previous rights.
Thus, by the Corporations Act 2001 of Australia, Leighton is not legitimate to continue as
managing director since his designation has not been renewed or reapproved by the board of
directors of AS. In this regard, it is valid to assert that Leighton has exceeded his authority to
decide on establishing a tourist and caravan park and signing a contract with Build Em
Architects1.
In this regard, it needs to be remembered that by the postulates of Chapter 6 of the
Corporations Act of Australia (2001), the agreement that has been constructed between
Leighton (as a representative of AS) and Builds Em Architects is a statutory contract. Thus,
in an empirical tone, it can be said that it does not depends upon the consideration of the
board of directors of AS that whether Leighton has exceeded his authority or not.
Furthermore, when Alice, as a financial manager, has received the invoice of the first
installment, it is evident that Build Em architects have started working by the principles of
the contract signed between them and Leighton. Thus, whether the designation of Leighton is
valid or not and whatever the consideration that the board has regarding the limits of
authority of Leighton, they are bound to comply with the agreement that Leighton made with
Build Em Architects. Furthermore, if any violation of the conditions stated in the agreement
has been discovered, Build Em Architects is legitimate to claim for damage (injunction too)
as the agreement is a legally-bound agreement and the aspect of ‘transcending the authority'
have not been disclosed to them earlier2.
1 Act, C., 2001. Commonwealth of Australia. Google Scholar.
2 Bottomley, S., 2016. The constitutional corporation: Rethinking corporate governance.
Routledge.
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Breach of agreement of the object’s clause in AS’s constitution
In an empirical tone, it can be said that the object's clauses of the constitution of a corporation
can be considered equivalent to a contractual force by the Section 140 (1) of the Corporations
Act of Australia 2001. In the object clause (drafted by Coral), it has been clearly mentioned
that AS will restrict their trade within the organic farming of the Avocados which signifies
that the act of Leighton is a blatant violation of the object's clause of the corporation of the
entity. Though Leighton has replaced Coral with the appointment of Nuala (as the new
solicitor of the company), Nuala has not introduced any corrigendum of the prevalent
constitution of the company. However, it will not be able to govern the clauses that Leighton
has formulated with the Build Em architects by the legal statutes of Corporations Act and the
verdicts of Lee VS Chou Wen-Hsien (1984)3. However, in the course of advising Miles and
Patricia, as a legal advisor, I will suspect the enforceability of the contract as it has been
signed without the prior notice and approval of the directors of AS. In this regard, it is not
farcical to consider that the exponents of Build Em Architects have performed a legal wrong
by abiding a contract which is not approved by the directors of AS. For instance, in the
Schedule 3 of the Corporations Act 2001 as well as the verdict of the case Palmer V Duke
Group has clearly consolidated that to form a valid contract between two registered entities, it
is imperative for the conditions of the contract to be ratified by the directors of the
companies. Thus, the enforceability of the clauses of the contract deserves a reasonable
doubt4.
3 Stewart, J., Kent, P., & Routledge, J. (2015). The association between audit partner rotation
and audit fees: Empirical evidence from the Australian market. Auditing: A Journal of
Practice & Theory, 35(1), 181-197.
4 Duffy, M., 2018. Australian Private Securities Class Actions and Public Interest: Assessing
the private Attorney-General'by Reference to the Rationales of Public Enforcement.
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However, being the managing director of the company, Leighton is also allowed to sign the
contract on behalf of the enterprise. It can be possible that Leighton has convinced the
exponents of Build Em Architects that he is the ambassador of the cumulative consent of the
directors. In this regard, Miles and Patricia can reject the invoice of the first installment of the
payment and might seek the documents and testimonies that Leighton have forwarded just to
establish that all the directors have consented to the agreement. This is the only way out
available for Miles and Patricia to evade the burden of financial penalty.
Whether Coral can enforce the clause in the constitution appointing her as company
solicitor
Before the emergence of Nuala, Coral happens to be the solicitor of AS and the exponent
responsible for drafting the constitution of AS. In the course of drafting the constitution of the
enterprise, Coral have included an objective clause that she would not be dismissed except
any act of misconduct has been exhibited by him. Furthermore, she is also the component
which is registered that AS will restrict their trade within the organic farming of avocados. It
is evident from the scenario that Leighton has breached both of these objective clauses of the
corporate constitution of AS5.
By this brief proclamation, it is evident that Leighton has blatantly violated two fundamental
columns of the Corporations Act 2001 of Australia. In an illustrative tone, not abiding by the
objective clause of replacing the solicitor without any prior notice and legal intervention
exhibits the non-compliance of Leighton against the section 140 (1) of the same act.
Furthermore, by breaching the financial obligations of involving into another trade (tourist
and Caravan Park) apart from farming organic avocados is the blatant breach of section 516
of the same act. Thus, it is legitimate for Coral to claim legal intervention and eventually
acquire justice.
Regarding remedy, Coral can claim for a financial compensation before the replacement
without any proper solution. Apart from that, Coral can also the plea for the retrieval of her
position or at least a legal proceeding, which can justify the regain of his lost designation.
5 Whincop, M.J., 2017. From bureaucracy to the business enterprise: Legal and policy issues
in the transformation of government services. Routledge.
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Question 2: Advise Bethany and Chris
Whether the director of Great games have breached s181 of the Corporations Act 2001
Before embarking on the advice, it is imperative to discuss the corollaries of section 181 of
the Corporations Act 2001, which, in an empirical tone, have dedicated the chapter to discuss
the principles of good faith and civil obligations adjacent to the interest of the company. By
this legal statute, the directors of any company are supposed to exercise their powers driven
by a proper purpose, and those actions are required to cater the interests of the company6.
However, in this course, a fundamental ambiguity can be discovered before the relationship
of Great Games, and Great Adventures Limited as section 181 is prone to consider the
subsidiaries of parent entity as an individual entity whereas section 187 supposed to discuss
the duties of the directors of wholly owned subsidiaries. In this case, though Great Games
(hereafter GG) and Great Adventures Limited (hereafter GA) are supposed to operate under
the same brand image, it is reasonable to consider these as autonomous entities (thus, section
181 can be enforceable).
However, the discrepancy that strikes Bethany and Chris to go against the decision of
sanctioning loan is quite valid since, as an autonomous entity, GG must acquire the financial
expertise to cope up with their financial difficulties. However, as both GG and GA operate
under the same brand name and the adjacency of GG is required for GA to retain the requisite
viability in the market, it is justifiable for them to sanction a loan to GG to resolve the
financial difficulties that they are undergoing.
However, it can be explicitly addressed to Bethany and Chris that endowing GG with a
substantial loan is not illegitimate by the legal columns provided by the section 181 of
Corporations Act, especially the columns that illustrate the director's duties. It has been
clearly mentioned in the subsection of section 181 that the directors of a company is legally
6 Mazzarol, T., Mamouni Limnios, E., Soutar, G. and Kiessling, J., 2016. Australia's Leading
Co-Operative and Mutual Enterprises in 2015.
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allowed to exercise their powers to rescue the company from any kind of possible plight.
Furthermore, this action of sanctioning a loan to a profitable subsidiary unit is also allowed as
it is directly catering to the business interests of the respective firm. In this regard, I wish to
argue over the fact that, though Bethany and Chris is the non-executive director of the
company, they have not been informed regarding the sanctioning of this loan. Furthermore,
the consequences that the directors of GA appear to be petrified about are not that severe, as
claimed by both Bethany and Chris. In this regard, both of them can claim the executives
regarding the consequences that they are imagining. By the legal columns of Section 79 of
the same act, it has been clearly stated that the non-executive officers also need to be
considered as involved in the entire process.
In the current scenario, the 3 Directors – Zak, Taylor, and Abdulla appear to be gaining a
private advantage by providing the loan to GG from GA. In consonance with the decision in
the case of Mills v. Mills (1938) 60 CLR 150, this loan appears to be derived from an
improper purpose. The High Court held in the Mills matter that the Directors of a Company
should never breach their fiduciary duty and do an act which breaches their duty in any
manner, which is beneficial only for a particular category of shareholders, provided that the
said Directors are also part of that class of shareholders7. Applying this decision here, it
would mean that the Directors have breached their duty for personal gains and did not
consider the larger interest, which was not the problem here.
Equivalent equitable duties to Great Adventures Ltd
By several legal scholars, equitable duties can be referred to the fiduciary relationship
between the directors of both of the companies. In this regard, it is an exaggeration to
mention that a considerable amount of loyalty is required to keep this relationship glued8. In
this regard, the directors of GG and GA are required to approach the requisite loyalty
program, as discussed in section 181 of the Corporations Act 2001. However, as the conflict
of interests has been discerned in this case (the contradiction expressed by Bethany and Chris
against the decision of sanctioning the loan) can be considered as negative loyalty However,
7 Jason R Harris, Anil Hargovan and Michael A Adams, Australian Corporate Law.
8 Horrigan, B., 2017. Governance, Liability, and Immunity of Government Business
Enterprises and Their Boards. In From Bureaucracy to Business Enterprise (pp. 143-171).
Routledge.
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keeping in mind the Mills decision of the High Court, it is imperative to understand the issue,
in that case, was raised regarding a resolution which was passed by the majority Directors of
that company – Charles Mills (Uardry) Ltd. and was in the best interest of the company,
should that resolution be considered bona fide. The Court opined that it is not necessary that
the Director acted to favor an improper purpose, even if it is beneficial to that Director.
Even with such advancements in Australia, there have not been much in the area of fiduciary
principle and its link with loyalty. It is also known as ‘proscriptive principle.' To explain this,
we must appreciate the fact that the fiduciary principle is considered to have a direct
relationship with the advancement of interests of the company or own self. Thus, the
fiduciary should never use his position or power for advancing benefits for his own self.
In this regard, the decision of sanctioning the loan can be revisited where the directors of the
respective entities need to be judged. In this regard, the major point that can be discovered is
the fact that the directors of both GG and GA have kept the discretions (regarding sanctioning
the loan) unfettered which is a sign of positive loyalty. Apart from that, they have been also
discovered to exercise the decisions that they have taken without prior consent or information
to the major non-executive officers who, as per the contravention, are also involved in the
operations of the enterprise9.
It is evident that the directors of both of the companies cannot be blamed to agree with them
to cope with the governing corporate interest while avoiding the loopholes that might lead an
entity towards conflict of interests. Furthermore, the exponents of both of the companies can
be considered as the fact that, in most of the cases, the conflict of interests is typical to
emerge out of personal catering interests. In this regard, the directors have not exhibited any
anomaly through which they can be considered to cater to individual interests. . In a
conclusive tone, it can be said that the major responsibilities and the equitable responsibilities
of the directors happen to encourage them to be loyal and cater to the interests of the
company.
9 Mazzarol, T., Mamouni Limnios, E., Soutar, G. and Kiessling, J., 2016. Australia's Leading
Co-Operative and Mutual Enterprises in 2015.
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References
Act, C., 2001. Commonwealth of Australia. Google Scholar.
Bottomley, S., 2016. The constitutional corporation: Rethinking corporate governance.
Routledge.
Stewart, J., Kent, P., & Routledge, J. (2015). The association between audit partner rotation
and audit fees: Empirical evidence from the Australian market. Auditing: A Journal of
Practice & Theory, 35(1), 181-197.
Duffy, M., 2018. Australian Private Securities Class Actions and Public Interest: Assessing
the private Attorney-General'by Reference to the Rationales of Public Enforcement.
Finn, P. D. (Paul Desmond) & Queensland Institute of Technology. Law Library 1977, Fiduciary
obligations, Law Book Co, Sydney.
Whincup, M.J., 2017. From bureaucracy to the business enterprise: Legal and policy issues
in the transformation of government services. Routledge.
Mazzarol, T., Mamouni Limnios, E., Soutar, G. and Kiessling, J., 2016. Australia's Leading
Co-Operative and Mutual Enterprises in 2015.
Bruce, A. and Faunce, T., 2017. Food production and animal welfare legislation in Australia:
Failing both animals and the environment. In International farm animal, wildlife and food
safety law (pp. 359-394). Springer, Cham.
Harris, J., Hargovan, A. and Adams, M. (n.d.). Australian corporate law.
Horrigan, B., 2017. Governance, Liability, and Immunity of Government Business
Enterprises and Their Boards. In From Bureaucracy to Business Enterprise (pp. 143-171).
Routledge.
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