Law of Business Associations Assignment: UVAC and Lovely Teas Pty Ltd

This assignment solution addresses a Law of Business Associations hypothetical case, analyzing the duties and liabilities of company directors under the Corporations Act 2001. Part A examines the rights of Class A shareholders in Unique Victorian Arts and Crafts Ltd (UVAC), focusing on the directors' misuse of power and the criteria for amending the company's constitution. It explores whether a director, Norah, can prevent the company from operating on a shortlist prepared without shareholder consent. Part B delves into the duties of directors, including care, diligence, good faith, and the proper use of position and information. It discusses the legal consequences of breaching these duties, including penalties and remedies, and examines Elizabeth's liability for debts of Lovely Teas Pty Ltd. The solution references relevant case law and statutory provisions to support its conclusions, providing a comprehensive overview of corporate governance and director responsibilities.

RUNNING HEAD: LAW OF BUSINESS ASSOCIATIONS
Law of Business Associations

LAW OF BUSINESS ASSOCIATIONS
Part A
Overview
The director’s duties fall under the Corporation Act 2001 (CA) that describes the way in
which the company shall operate i.e. adequate economic records, decision taken with due
care and diligence and in good faith, no misuse of the role or information of the director, and
the provision of strategic advice. This study will define Norah's privileges as preventing
Unique Victorian Arts Crafts Ltd from operating on a shortlist provided by certain internal
sources without the consent of Class A shareholders. It will also identify the criteria for
amending the constitution as well as whether Norah has the right to avoid amendment in the
constitution of company.
Legal Consequences as per the Corporation Act
The directors must act in best interest and bonafidely in what they consider and not what the
tribunal may consider is in the benefit of the corporation as per the case of Re Smith &
Fawcett Ltd (1942) CH 304. The Corporations Act 2001 contains various duties of director
(Cowley & Knight, 2017). According to sec 180 of the CA, the director or other employees
of a company must practice their authority and carry out their duties closely and diligently
(Langford, 2014). This obligation is subject to a law of business judgment requiring the
director to give a judgement on the company; to create a choice properly and in good faith,
not to have a material private interest in the topic matter of the judgment; to be honest, to
believe that the choice is in the best interests of the company (Baxt, 2015). Likewise, in the
given scenario Norah, who is a member of the board of the directors and maintains Class A
shares. Georgiana and Yasmin, being the board of directors of the company, had the duty of
care and diligence in accordance with sec 180. However, they misused their power by
selecting Seek-Easy Consultant to perform a review and shortlisting method for the
appointment of directors without consulting Class A shareholders. To appoint director advice
of Class A shareholder is necessary, they knew such fact still it was not consulted by them.
According to sec 182 of CA, directors are forbidden from misusing their role in order to
receive benefits for themselves or someone else or detriment to company (Tricker & Tricker,
2012). Whereas according to sec 232 of the CA the court may give order under sec 233 if any
directors has acted unfairly, oppressive, unfairly discriminatory against any director or
directors either in that capacity or in any other capacity (Hepburn, 2013). Whereas, in
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LAW OF BUSINESS ASSOCIATIONS
accordance with section 183 of the acting directors, the information obtained because of their
role with the company in order to achieve benefits for themselves or someone else or to the
detriment of the company is forbidden (Kiel et al., 2012). Likewise, in the given situation
Georgiana and Yasmin infringed the provisions set out in sec 182 and 183 of the act as they
directed the consultant not to include Norah in the short list for their own and personal
interest. As well as they have breached provisions laid down in sec 232, Norah can file suit
and obtain court’s order under sec 233 as Yasmin and Georgiana acted against the Norah.
Each Australian company is governed by its own collection of legislation outlining how the
company will function (Bottomley, 2016). Many companies laid down these rules in a
corporate constitution. These guidelines are also termed, as replaceable rules in the CA
(Australia, 2011). Directors who violates these rules can be held liable under the CA
(Saunders & Stone, 2018). In order to amend the business constitution, few processes are
enacted that must be strictly followed (Harris et al., 2016). The replaceable regulations
provide a helpful and fundamental structure in the Corporations Act that can be fully adopted
or modified to meet the demands of the business (Bruner, 2013). The CA offers different
laws that can be replaced to change the company’s constitution (Yogaratnam et al., 2016).
Anyone who does not follow the laws or violate those laws will be in contravention of the
agreement (LexisNexis, 2016). Members may apply for a court order seeking compliance to
or compensation from the replaceable regulation (De Plessis et al., 2014).
As in the case of Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL
(1968) 121 CLR 483, it was determined by the court that the concept is that although mainly
the authority is provided to allow funds to be collected when needed for the company's
purposes, there may be opportunities for directors to award shares reasonably and
appropriately for other reasons, provided that those reasons apply to the intent of benefiting
the corporation as a whole, as differentiated from a function. Furthermore court stated that the
ultimate question must always be whether the problem was honestly raised in the company's
interests. Likewise, in the given case study, Georgiana and Yasmin tried to amend the
constitution with the consent of the Norah as well as they did not intend to act for the benefit
of the company. They wanted to amend the constitution of the company for their own
benefits and to deprive Norah from being re-elected as director of the company. Georgiana
and Yasmin did not act in good faith and for the benefit of the company. Thus, Norah can
prevent them from allowing them for the buyback of the Class A shares.
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LAW OF BUSINESS ASSOCIATIONS
Conclusion
It can therefore be stated from the above that Norah is entitled to avoid Unique Victorian Arts
and Crafts Ltd from operating on the shortlist provided by other advisors. The company's
guidelines and strategies have not been pursued since the advisor authorized by the
shareholders of Class A has not provided the shortlist and Norah is entitled to avoid the
change, as the replaceable guidelines given in the law have not been met.
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LAW OF BUSINESS ASSOCIATIONS
Part B
Overview
The Corporations Act 2001 (Cth) requires managers and other business officials to practice
their authority and perform their responsibilities with the degree of care and diligence that a
rational person would practice. This study will define the role of directors in a company,
duties and liabilities of directors in case of breach of their duties. It will also define the
remedies that the parties may claim under the given scenario. Furthermore, it will state the
Elizabeth’s liability for debt owned by her for Lovely Teas Ply Ltd by court under Terrific
Teas and Coffee Ply Ltd.
Legal consequences as per Corporations Act
The CA provides four types of duties of director in Australia, these are Care and diligence (s
180), duty of good faith (s 181), duty not to use position improperly (s 182) and duty not use
information improperly (s 183). According to Section 181 of the Corporation Act, multiple
duties are linked to each obligation that can bare penalties unless adequately done. In
Australia, the company's directors are required to behave for the company's greatest interests.
Sec 181 gives rise to civil obligations. In a situation where a tribunal finds that a civil penalty
law has been breached, it must make a statement to that impact, may order the individual to
pay a pecuniary punishment of up to $200,000 to the Commonwealth, and may order the
individual to compensate the business for any failure resulting from the breach as well as the
tribunal may also disqualify the director for a duration that the tribunal deems suitable as per
sec 206C of Corporations Act (Keay, 2014).
In the given case study, where the company's directors chose to integrate a distinct
corporation and the older one's assets would be paid off from the business of the current
company. They also completed their commitment, but even after the tribunal ordered to pay
compensation to Elizabeth in a legal order bound on the director, she remained unpaid.
The general obligation of each director under this section of the law is to create appropriate
decisions and that, in good faith, they must not have any private stake in the subject matter of
that judgment, they must obtain only the quantity of expertise needed and, finally, they must
have faith that the decision was certainly produced for the good faith of the company
(Paolini, 2014).
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As in the case of Hindle v John Cotton Ltd (1919) 56 Sc LR 625, the court held that, where
the abuse of power is in issue, the state of mind of those who have behaved and the
motivation for them are all crucial. It can be determined by looking into the circumstantial
evidence which lead to such conduct and all the particular material available which throw
light upon the concerned issue of condition of mind of the directors so as to prove that they
were acting honestly and bonafidely in the interest of the company or were acting purposely,
by some motive or for personal advantage. Likewise, in the given case study, the director did
not acted in good faith and they breached their duty of good faith as it can be determined by
their act by not paying Elizabeth even after she was entitled and declared clean as well as she
was working for best interest of the company.
In the case of MG Corrosion Consultants Pty Ltd v Gilmour (2014) FCA 990, it was held by
the court that the director's obligation was to behave in a way best suited to the company's
interests. Similarly, it has been seen that this given situation has resolved remainders for the
directors they are needed to fulfil their responsibilities. In the given scenario, directors were
seen beaching their responsibilities as it was already established that Elizabeth was paying off
with the compensation of her share, but because the directors did not do their obligation in
good faith, they totally ignored Elizabeth's payment.
Elizabeth and Jean were the company's former workers, and Elizabeth was alleged to have
been involved in the wrongful dismissal and to have developed a successful scheme to hold
marketing campaigns for lovely Teas, and the tribunal also approved it in its final judgment
by the directors, regardless of the appropriate ground, without any good faith or good
purpose.
Various penalties may be imposed by the ASIC if the directors breach the obligation of good
faith, the first being punitive penalties, i.e. financial compensation, the second being
restrictive, the third being preservative, the second being corrective, the second being
compensatory. It was seen in the given scenario that court ordered in the favour of Elizabeth
and ordered the Lovely Teas to offset her, specifying all the allegations beyond her. Sec 206C
CA sets out all the penalties that could be placed on the directors while infringing their
responsibilities.
Terrific teas and Coffee Ply Ltd. was a subsidiary created by Lovely Ply Ltd's directors, and
the directors also passed a resolution that all Lovely teas ply Ltd's debts would be cleared by
the newly-framed company's business.
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Conclusion
From the given case study, it can be concluded that the directors of Lovely Teas Pty Ltd had
infringed sec 181 of the CA while performing their responsibilities in order to be penalised.
Court had stated that Elizabeth is responsible to seek compensation from the corporation that
was very cleanly ignored by the company's directors, while settling the older company's other
obligations by advertising the fresh one.
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