Detailed Case Study on Company Law, Director's Duties & Obligations

This case study delves into two primary legal issues concerning company law. The first issue involves Salman's ability to prevent the inclusion of a clause in the company's constitution that grants directors the power to expropriate her shares, analyzing the limitations placed on majority shareholders' ability to amend the constitution for expropriation purposes, particularly concerning proper purpose and fairness to minority shareholders. The second issue addresses Melanie's capacity to enforce a contract against Astounding Gifts Pty Ltd, created by Ryder on behalf of Incredible Gifts Pty Ltd before the company's registration, examining the ratification of pre-registration contracts and the liabilities imposed on individuals creating such contracts, ultimately concluding that the contract is enforceable due to ratification. The second question examines whether the directors of Chip-Eze Pty Ltd can be held liable for breaching their duties under s181 of the Corporations Act by transferring a profitable business to a new company they incorporated while Chip-Eze was facing financial difficulties. It also discusses the potential actions Faizah can take against Jordan for breaching his duties as a director by selling shares to her while aware of the company's critical financial condition, analyzing the duties imposed on directors by the Corporations Act and common law regarding improper use of their position and information.

Question 1
A. Advice for Salman
In this part of the question, the process related with the Constitution of the company needs to be
examined and at the same time. It needs to be seen if Salman can prevent the other directors of
the company from including a clause in the Constitution. According to which a power has been
given to the directors to expropriate her shares.
The law provides that the company can modify or repeal its constitution with the help of a
special resolution passed by the shareholders. That resolution has to be passed by at least 75% of
the shareholders. This situation can be compared with other types of contract where all the
parties should agree to an amendment in the contract. Therefore, with the help of 75% Majority,
it is possible to amend the constitution of the corporation.1 It needs to be mentioned that such
amendments will be binding for the minority shareholders even if they may have voted against
the amendment, unless the common law, constitution or statutory protections provide for any
additional requirements.
After the decision given in Gambotto v WCP, certain limitations have been placed on the power
enjoyed by the majority shareholders of amending the Constitution in order to expropriate the
shares of minority shareholders. In view of this decision, it is necessary that any amendment
made to the constitution to give power to the majority to expropriate shares of minority can be
considered as valid only if the power has been given a proper purpose and the power does not
1 H A J Ford and R P Austin, Ford and Austin’s Principles of Corporations Law (Butterworths, 7th ed, 1995) 262

operate oppressively for the minority shareholders.2 Therefore it is necessary that the power
should be fair under the circumstances.
In this case, a members' meeting was called by Kody and Ryder. In this meeting a resolution was
passed in order to other demonstration of Astounding Gifts and to provide that the directors of
the company have a power to decide to buy back the shareholding of less than 12 percent.
However, as required by law it is necessary that any amendment made in the Constitution to
provide power to the directors to expropriate the shares of of the minority or valuable rights that
are attached to the shares, it is necessary that the amendment should have been made for a proper
purpose. Moreover, it is also necessary that the amendment should not be unfair for the minority
shareholders.
In view of these requirements, Salman can prevent the company from introducing a clause in the
constitution of the company which gives a right to the majority to expropriate the shares of the
minority.
B.
It needs to be seen if Melanie can enforce the contract against Astounding Gifts Pty Ltd that has
been created by Ryder in the name of Incredible Gifts Pty Ltd.
According to the law, before a company has registered, it cannot become a party to the contract.
As a result, a pre-registration contract can be described as a contract that has been created by a
person on behalf of or purportedly on behalf of the company we work the same has been
registered with the ASIC. In this regard, it has been provided by the Corporations Act, 2001 that
2 R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, 15th ed, 2013) 432

it is possible for a company to ratify a preregistration contract after it has been created. In such a
case the contract dated before the recession of the company becomes binding for the company.
At the same time, liability has been imposed by the Corporations Act on the person who has
created the contract on behalf of the company, to compensate the company in case any laws has
been suffered by a third party as a result of the fact that they registered company fails to ratify
the contract or it fails to perform the obligations imposed on the company under the ratified
contract.3 In case of such a liability, a person may seek release from liability towards the third-
party the person has no right of indemnity against the corporation. It has been provided by the
law that where the registered company fails to ratified the contract later on, an order may be
issued by the court that it considers to be appropriate under the circumstances. Such order
includes an order according to which certain actions have to be taken by the company. It also
needs to be noted that any rights or liabilities that may be available to a person otherwise, on
account of a preregistration contract have been replaced by the rights and obligations that have
been provided in the Corporations Act.
In this case, Ryder had entered into a contract with Melanie on behalf of Incredible Gifts Pty Ltd.
This company was yet to be registered. Therefore, when the parties went to register the company,
they came to know that the name Incredible Gifts has already been taken by another company.
As a result they decide to register their company under the name of Astounding Gifts Pty Ltd.
The company started to pay $5000 per month to Melanie. But in July, the board of the company
decided that the company will refuse to continue to make the payment to Melanie. Under these
circumstances, it can be said that in the present case, the promoter of the company, Ryder had
delegated contract with Melanie. Although the name used in the contract was Incredible Gifts,
but later on, the company was registered in the name of Astounding Gifts. Therefore it can be
3 H A J Ford, Principles of Company Law (Butterworths, 2nd ed, 1978) 345

said that in the present case, the company can be reasonably identified. Moreover, the contract
created by the promoter, Ryder has been ratified by Astounding Gifts. The company even made a
payment to Melanie for a few months. As a result, it can be stated that in the present case, the
contract has been ratified by the company. Hence the contract is legally enforceable against the
company. In the present case, the Melanie can claim the monthly payments for the rest of the 12
months contract.
Question 2
A.
It has to be seen here if the directors of Chip-Eze Pty Ltd can be held responsible for the breach
of duty prescribed by s181. The reason behind this issue is that when the company has been
facing financial problems, the directors decided to transfer the profitable business of the
company to another company that was incorporated by them. Under the name of Freeze Me Pty
Ltd.
In this regard, the law provides that when the directors are going to dispose of the assets or the
business of the company, which is facing financial difficulties, the director should consider all
the alternative courses of action available to them. The director should also be in a position to
establish that it was honestly believed by them that the course of action taken by them was in the
best interests of the corporation and they had taken prisoner the appropriate.4 Whenever a
company is in financial difficulty, there are three options available to the directors. Therefore,
the directors may arrange for the sale of assets of the company to an associated company; the
company can go into liquidation, and the assets can be sold by the liquidated as a going concern;
4 John H Farrar and Brenda Hannigan, Farrar’s Company Law (Butterworths, 4th ed, 1998) 382

or the company may go into liquidation and the assets of the company can be sold by the
liquidator in the open market.5
On the other hand, it is available to the liquidator to claim that there has been a breach of duty by
the directors, which requires the directors to exercise due care, skill and diligence and promote
the success of the corporation. The breach of these duties can be claimed by the liquidator if the
directors have placed the interests of the other company before the interests of the company
while arranging for the sale or transfer or in the sale was not for the best price available.
Similarly if the sale for a deferred payment was high risk move and it was not in the best
interests of the creditors of the company.
In the present case, Chip-Eze Pty Ltd had to businesses. While the business of manufacturing
potato crisps and other snack foods have been making the loss for the last few years, yet the
business of manufacturing frozen potato chips and other foods was reasonably profitable. Under
these circumstances, the directors of the company Jordan, Michaela and Marianne, owning 25%
shares each in the company decided that a separate company should be incorporated under the
name of freeze Me Pty Ltd. According to the resolution, the profitable frozen food business was
going to be transferred to this company. The directors passed this resolution unanimously.
Therefore, the new company was incorporated and the assets related with the frozen food
business were transferred to it. Now the liquidator, Archibald wants to know if this amounts to a
breach of duty by the directors. In view of the legal position discussed above, it can be said that
in the present case, the directors of the company, Jordan, Michaela and Marianne can be held
liable for the breach of the duty including the duty that has been imposed on the directors by
s181. This duty requires that the directors have an obligation to discharge their duties in good
faith. Moreover, the powers given to the directors should be used by them for proper purpose.
5 W E Paterson and H H Ednie, Butterworths, Australian Company Law, vol 2 (2nd ed, 1976)

Under the circumstances, in the present case, it can be concluded that there has been a breach of
duty by the directors of the company.
In case the directors failed to perform their duties that have been imposed on them by the
Corporation Act and also the common law, the director may be held guilty of a criminal offense.
In such a case, the penalty may go up to $200,000 or imprisonment after five years or both. It
may also be held that such director has waged a civil penalty provision. In such a case, the
director may be ordered to pay a fine of $200,000. A director may also be held personally liable
to compensate the company or any other party for any loss or damage that may be the result of
the breach of duty by the director. At the same time, the director may also be prohibited from
managing a corporation in future.
B.
In this part of the question, it needs to be seen if Faizah can pick action against Jordan for the
breach of his duties as the director of Chip-Eze Pty Ltd. Jordan sold 5% of his shareholding to
Faizah. Even when he was aware of the critical financial position of the company. Soon after
transferring shares to Faizah, the company went into liquidation.
Strict duties have been imposed on the directors by the Corporations Act, as well as the common
law. In this regard, the Corporations Act provides that the directors are under a duty which
requires them to refrain from using their position in the company improperly. As a result of this

duty, the directors should not use their position improperly.6 The improper use of position by the
directors takes place when the director has used the position for achieving a benefit for
themselves or with a view to cause a loss to the company. This duty has been imposed on the
directors by section 182. Another relevant duty in this regard is the duty mentioned in section
183. According to this duty, the directors should not use any information that has been received
by them as a result of their position in the company and while performing the duties of the
director, improperly.7 It can be said that the information has been used by the directors
improperly if the directors have used the information for the purpose of achieving personal
benefit or to cause any loss to their corporation.
In the present case, Faizah approached Jordan and asked if she can purchase additional shares in
Chip-Eze Pty Ltd. This transaction was completed on 8th of August. Under this transaction,
Jordan sold 5% off his shareholding to Faizah. However, the creditors of the company who had
not been paid, maybe an application to the court and an order was made by the court that are
liquidated should be appointed and the company should be wound up. In view of the above-
mentioned circumstances it is clear that there has been a breach of duty by Jordan.
Therefore, Faizah can take action against Jordan for the breach of duty as the director of Chip-
Eze Pty Ltd.
6 Douglas Menzies, ‘Company Directors’ (1959) 33 Australian Law Journal 156
7 Zelman Cowen, ‘Company Directors: Their Powers, Duties and Responsibilities’ (1967) 2 University of Tasmania
Law Review 361

Bibliography
Douglas Menzies, ‘Company Directors’ (1959) 33 Australian Law Journal 156
H A J Ford and R P Austin, Ford and Austin’s Principles of Corporations Law (Butterworths, 7th
ed, 1995) 262
H A J Ford, Principles of Company Law (Butterworths, 2nd ed, 1978) 345
John H Farrar and Brenda Hannigan, Farrar’s Company Law (Butterworths, 4th ed, 1998) 382
R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths,
15th ed, 2013) 432
W E Paterson and H H Ednie, Butterworths, Australian Company Law, vol 2 (2nd ed, 1976)
Zelman Cowen, ‘Company Directors: Their Powers, Duties and Responsibilities’ (1967) 2
University of Tasmania Law Review 361