QUESTION 1. The Ankita Winery is currently a general pa

Added on - 21 Sep 2019

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QUESTION 1The Ankita Winery is currently a general partnership firm run by two partners, Aysha andDilara who are involved in the business on day to day basis. They have equal rights, dutiesand liabilities in their discharge of duties, including the right to make decisions, sharing ofprofits, and administrative matters. Their business model fulfils all the essential elements ofa partnership firm explained under Section 5 of the Partnership Act, 1958, and includes thefollowing features as mentioned herein below:Both Dilara and Aysha are involved in the business and have equal interest andparticipation in the business.Both have an intention to run a profitable businessBoth have equal share of profitsBoth having contributed time, talent and money and sharing of managementresponsibilityBoth are keen to build a profitable entity.After the decision was made to sell a part of the business to Polat in lieu of the servicesprovided by him, it is wise to convert the existing partnership firm into a Proprietary Limited“Pty Ltd” company, with Dilara Aysha and Polat being the shareholders. The company willcontinue to be managed by the three directors, all of whom have set responsibilities in theirarea of expertise. The need to form a company in this case arises for the following reasons:Ease of raising finance: Raising finances through private investors or placement or equityinfusion is easier in case of companies. Since Ankita has long been facing cash crunch,raising capital will help clear the past dues, as well as help deployment of cash effectively. Aproprietary company can raise investment from prospective investors, bankers etc.Better access to talent, and resources: With the capital available, Ankita can have access tobetter talent and resources. Since Ankita is inclined to stabilize the existing business andimprove business prospects, company formation is a preferred model.Easy transfer of share: Since, Polat is a prospective shareholder of the company, x amountof shares can be transferred to him while the others can be retained by Aysha and Dilara. Incase of any prospective investor, some more shares can easily be transferred without anylegal or administrative hasslesWhy should Ankit choose company over a partnership?
Ease of Taxation: While the partnership requires the partners to show their effective controlover the assets, liabilities and profits emerging out of business, proprietary companies enjoytax advantages in addition to limited liability.Better credibility: as compared to a partnership. This will create a better image for thecompany in the eyes of the potential customers, bankers, investors and suppliers.Limited Liability:While in a partnership, each of the partners are equally responsible for thedebts, in a Pty, the liability of the shareholders is limited to the share capital they havesubscribed and the debts to which they have personally subscribed. The personal assets of theshareholders are not under threat if the company incurs financial losses and debts.Proprietary company is governed under the provisions of Section 45A of the CorporationsAct, which includes proprietary companies as well as the entities which convert themselvesinto proprietary company under the Act. Process of registration of proprietary company isrelatively simpler and can be made under Section 118 or 601 BD. Ankita Winery can convertinto a proprietary company under Part 2 B7 of the Corporation Act, 2001QUESTION 2Issue-Whether Amanda and Ruby are engaged in commercial unfairness and engaged in theacts of unjust enrichment and oppressive conduct against minority share holder? Whether Leoin this status as a minority shareholder, entitled to relief under Section 233 of theCorporations Act? Whether the due process has been followed for Leo’s removal from officeunder s 249 and s 203(C) has been complied with? What are the remedies available to Leo?Principle:Section 232 of the Corporation Act is relevant to the point of unfairly, discriminatory actagainst a shareholder caused by the abuse of power and control over the company in badfaith. Leo should therefore rely on this provision of the Act by stating that the Companydirectors have acted in the manner which is oppressive against him as a minority shareholder.In order to prove his point, Leo has to take the following grounds1.Refusal to consider payment of dividends despite the company making substantialprofits.2.Application of company funds to benefit the directors such as opting to lease twoexpensive cars for their exclusive use.3.Use of funds to the benefit of the majority by enriching themselves through excessiveraises and bonuses.4.Removal of Leo from the board arbitrarily
In re Roberts v Walter Developments & Ors(1997) 15 ACLC 882, the conduct of the majorityshareholder included failure to pay dividends, failure to consider the legitimate requests ofthe minority shareholder and refusal to give him access to the company records. Although, itmust be noted here that the, the lone act of not paying dividend does not amount tooppression, the relevant facts such as the directors paying huge raises and bonuses andextravagance to themselves have to be considered. The case of Shamshallah v CBDRefrigeration and Air conditioning Services Pty Ltd., is relevant to this point, to the extentthat though there has been significant jump in revenues, the dividend track record has notbeen good. There is no oppression meted out only because the executive directors havedecided to reward themselves with substantial increase in salaries. But when the same is donein bad faith, it results in commercial unfairness and oppression.Leo’s dismissal from office under s 203C(a) of the act had to be made after the directors aresatisfied that they have complied with all the formalities. A director cannot be compelled toresign where he has been appointed by ordinary resolution under s201(G). Although in thepresent case, we are not clear as to the constitution of the company allows them to do so, butthe statutory norms prescribe that fair procedures have been followed after taking intoaccount the unfair dismissal laws and natural justice requirements. In the present casehowever, it is evident that Leo has not been accorded a chance to defend himself or givinghim a chance to speak. Such removal is arbitrary, unjust and against the principles of naturaljustice and equity.RemediesLeo can approach the court for remedy under Section 233 of the Act, for action againstAmanda and Ruby and contrary to the interests of the shareholder. The breach of duties bythe performing directors have given rise to the Leo’s rights Although the best remedy here isto seek an order from the court for the buying of his shares at a price determined by the court,there are a number of other legislative remedies to which Leo is entitled to, that include:He can seek for the winding up of the companyHe can bring about legal proceedings and seek an order of injunction restraining thedirectors from removing him as a shareholder.Bringing an action against the existing directors and exercise his right as a director ofthe company, having access to the books, dividend as well as other legitimateentitlements.
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