Legal Advice on Business Association Scenarios

This article provides legal advice on various business association scenarios including contract formation, breach of duties, and more. It covers topics such as the indoor management rule, directors' duties, and remedies for breach of contract. The article is relevant for students studying business law and related courses.

LAW OF BUSINESS ASSOCIATIONS
Student Name
[Pick the date]

Question 1
A legal advice needs to be extended to Raj and Alana for the given scenarios.
A) Organic Wines Pty Ltd (OW) would be bound with the contract enacted with Seedy
Vineyards or not under the following circumstance.
Case 1: Priya has enacted a contract with Seedy Vineyards while exceeding her authority for
contract formation on behalf of OW
Case 2: The breach of objects clause highlighted in the constitution of OW
Company has separate legal entity in accordance with s.124 (1). However, it is imperative that
company must appoint agents who will enact contracts with outsider parties on behalf of the
company. Further, it is noticeable that some of the agents may enact contract with outsider party
irrespective of the presence of requisite authority1. Therefore, in such cases s. 129 Corporations
Act 2001 would be taken into consideration. According to s. 129, third party can make
assumptions regarding the aspect that agent is duly assigned by company and hence is enacting
the contract on behalf of the company with required authority2. This aspect is termed as indoor
management rule and the verdict stated in Royal British Bank v Turquand3 case is the testimony
of this aspect. Further, s. 128 would be taken into account for the exception of the assumption of
s. 129 only when it is evident that third party who has entered into the contract with the agent
had reasonable suspicion or knowledge regarding the authority of the agent before contract
enactment4. Section 125 (2) indicates that breaching of the object clause alone would not restrict
the action of the company and hold it untenable. It means s. 125(2) expands the range of the
action of company with the third parties irrespective of breach of objects clause as highlighted in
the constitution of the company5.
In the given scenario, it can be seen that Priya who is daughter of Raj and Alana is working as
the managing director of OW. Here, she has made a contract with Seed Vineyards for a
1 Jason, Harris, Corporations Law, (LexisNexis Study Guide, 2nd ed., 2014)
2 Austlii, Corporations Act 2001- Sec 129 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s129.html
3 Royal British Bank v Turquand (1856) 6 E&B 327 case
4 Austlii, Corporations Act 2001- Sec 128 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s128.html
5 Austlii, Corporations Act 2001- Sec 125 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s125.html
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consideration amount of $500,000. It can be said that Priya does not have requisite authority to
enact the contract with third parties for the following two reasons.
 She has been appointed as managing director of the OW only for two years and her tenure
has finished in February 2018 and also she has not been duly reassigned to the position of
managing director. However, she continues her work as managing director for OW.
 Secondly, she has authority to enact a contract with third party for a consideration of not
higher than $100,000. However, she has made enacted a contract for a sum of $500,000.
In such cases, it is essential that Priya lacked the authority to enact an enforceable contract with
Seedy Vineyard.
Furthermore, she should have taken necessary approval from the board of directors before
enacting the contract. However, here indoor management rule would be applicable under s. 129,
as Seedy Vineyard does not have any suspicion regarding the lack of authority of Priya and
hence, OW would be bound with the contract made by Priya with Seedy Vineyard. Further, it is
essential to note that Priya has breached the objects clause highlighted in the constitution of
company regarding the organic grapes for the wine as she enacted a contract for buying non-
organic grapes from Seedy Vineyards. In this case also, the company is held liable to complete
the contractual liability with Seedy Vineyards under s. 125(2) as the enacted contract is not void
due to the breach of objects clause6.
Therefore, it can be concluded that OW has to complete all the contractual liabilities which are
raised due to the contract enactment carried out by Priya with Seedy Vineyard irrespective of the
aspect that Priya lacked required authority. Further, there would be no effect incurred on the
contractual liability for the case when there is breached of objects clause by Priya by ordering
non-organic grapes.
B) To ascertain whether the clause in constitution for appointing himself as company solicitor is
enforceable and also, the available remedies for Ted if the breach of this clause is incurred.
According to s. 140 Corporation Act 2001, constitution of a company is an essential document
which includes numerous aspect in relation with the work, contracts formation, authorities,
6 Ibid. 9.
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appointment and so forth. Further, it forms the basis of contractual relations among the company
members and between directors and company in regards to the clauses in the constitution7.
Therefore, it is imperative that each member must obey the constitution of the company and
work according to the provisions of the constitution8. Part 2F includes remedy in relation to the
fact that a member can get issued a court order if other members of the company have behaved
contrary to the interest of one member and dismiss the appointment of that member from the
company without any reason rather than the dismiss clause highlighted in the constitution9.
It can be said based on the given information that Ted drafted the constitution of OW and also
made a clause related to him being the solicitor of OW who could be dismissed from the
company only for his misconduct which is highlighted in the objects clause. However, Priya has
assigned her boyfriend Carl to the position of solicitor of OW and has dismissed Ted from the
position. As per s. 140, Corporation Act 2001, it is essential that all members including Priya
should not harm the interest of other members as per the clauses of constitution.
Therefore, it can be concluded that Priya cannot dismiss Ted and also cannot appoint Carl based
on the provision of company’s constitution as Ted has not indulged in any misconduct and
therefore, she should not fire Ted. Further, if she does fire Ted then, he has the legal position to
procure a court order under Part 2 F (1) against the decision of Priya.
Question 2
A legal advice needs to be extended to Olive for the given scenarios
(A) Whether Karim and Miles the two of directors of Seedy Vineyards have breached s. 181
Corporation Act 2001 or breached the duties of director by refusing the register for transfer
of shares of Olive. The various penalties or remedies would also be determined for the given
case.
7 Austlii, Corporations Act 2001- Part 2Fhttp://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/part2F.html
8 Ibid., 1.
9 Julie, Cassidy, Corporations Law Text and Essential Cases, (Federation Press, 4th ed., 2013)
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There are common law and statutory duties that are imposed on the directors of the company. An
imperative duty is highlighted in s. 181 Corporation Act 200110. In accordance with this section
directors of the company must exercise their power in good faith of company and also must
utilize it for right purpose for the interest of shareholders. Breach of duty under s. 181 would
result in civil penalties on the concerned directors as per s. 1317 E Corporation Act 2001.
Further, as per s.1072 F (3), directors of the company can refuse transfer for shares only for the
two scenarios which includes these two conditions which are mentioned below.
 The respective shares are not completely paid
 Presence of existing lien on the respective shares
When there is absence of the above two scenarios then, the director or any other relevant
authority cannot refuse to register the transfer of share. The case when any directors uses their
power to do the same without the validation of s. 1072 F (3), then, it would be stated that director
has used authority in an improper manner and has breached duties in accordance of s. 181. In
such case, the transferee has remedies which are defined in s.10 F (1)11. It highlights that when
directors intentionally refuse the register transfer of the shares without proper reason then, the
transferee can take court order against the actions of director. If the claim of the transferee
related to the decision of directors for not registering transfer of shares is true, then court would
issue an order to instruct the directors to perform the registration transfer of the shares as per
1071 F (2)12.
It is apparent that Karim, Miles and Olive are the three shareholders of Seedy Vineyards Pty Ltd
with the respective share percentage of 45%, 45% and 10%. Further, the company was not
deriving significant profit and hence, was unable to pay dividends to shareholders. Thereby,
Olive has decided to sell her shares. Also, both the directors Karim and Miles are having strong
intention to acquire the shares of Olive but could not purchase due to the insufficient fund.
Furthermore, Olive has decided to sell 5% of her shares to managing director of OW Priya.
However, both the directors have refused register transfer of shares irrespective of the fact that
10 Ibid. 6.
11 Austlii, Corporations Act 2001- Sec 181 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s181.html
12 Austlii, Corporations Act 2001- Sec 1071F
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s1071F.html
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there is no breach incurred of the conditions highlighted in s. 1072(3)13. However, it would be
noticeable that Miles and Karim have breached the directors’ duty under s. 181 as they have
restricted the register transfer for shares for Olive so that she could not sell her shares to Priya
and later on, they would acquire the shares from Olive. The directors are working for personal
interest and not for preserving the interest of the shareholders. Therefore, in such scenario, Olive
can get issued a court order to get the registration transfer of shares as per s. 1071 F (1) and can
sell the shares to Priya14.
(B) Whether Olive has any remedy against Miles for possible breach of the director’s duty by
acquiring the shares without informing her regarding the improved financial prospects of
company.
Under s. 191 Corporations Act 2001, it is essential that directors of the company must disclose
the information related to the conflict of interest of the company in regards to obeying their
duties in a faithful manner and in the interest of the shareholders15. Also, s, 183 forbids the
director from using the information received on account of their position to derive profit for
themselves or associates16. The breach of this duty would lead to civil penalty which is
highlighted in s.1317 E Corporations Act 2001.
It can be said that on June 2, 2018, Miles was ready to purchase the 5% stake of Olive. It is
because they might receive an order of tune $500,000 from the contract enacted with OW.
Further, it is not essential that as a director of the company Mike and Karim must disclose the
enactment of contract with OW to Olive as per s. 191 since it limits only to the shareholders.
Further, s, 183 requires that directors must not earn personal profit from private information
about the company which the directors are doing in this case by making attempts to purchase
shares from Olive without informing her. This is apparent from the fact that rather than
informing her about the contract, Karim has extended an offer to purchase the 10% shareholding
of Olive and hence, is working for self-interest. This self-interest can be established since Seedy
Vineyard has declared a dividend in that year five times higher than normal dividend announced
13 Austlii, Corporations Act 2001- Sec 1072 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s1072.html
14 Austlii, Corporations Act 2001- Sec 1071F
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s1071F.html
15 Austlii, Corporations Act 2001- Sec 191 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s191.html
16 Austlii, Corporations Act 2001- Sec 183 http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s183.html
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in past three years. Hence, there is breach of duty of director by Karim in accordance of s. 183
and Olive has legal remedy to approach court. Further, civil penalty would be imposed to Karim
on the account of breach of duty and profiting on account of private information.
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Bibliography
Austlii, Corporations Act 2001- Part 2F
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/part2F.html
Austlii, Corporations Act 2001- Sec 1071F
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s1071F.html
Austlii, Corporations Act 2001- Sec 1072
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s1072.html
Austlii, Corporations Act 2001- Sec 125
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s125.html
Austlii, Corporations Act 2001- Sec 128
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s128.html
Austlii, Corporations Act 2001- Sec 129
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s129.html
Austlii, Corporations Act 2001- Sec 181
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s181.html
Austlii, Corporations Act 2001- Sec 183
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s183.html
Austlii, Corporations Act 2001- Sec 191
http://www5.austlii.edu.au/au/legis/cth/num_act/ca2001172/s191.html
Jason, Harris, Corporations Law, (LexisNexis Study Guide, 2nd ed., 2014)
Julie, Cassidy, Corporations Law Text and Essential Cases, (Federation Press, 4th ed., 2013)
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