LAW504 Business and Corporations Law Case Study: Sparkles Pty Ltd

This case study examines a business law scenario involving Sparkles Pty Ltd, a company specializing in custom jewelry. The analysis addresses three primary issues: whether the actions of Roger, a director and CEO, violated the Corporations Act 2001 by selling company products to his nephew at an undervalue; whether the company board's decision to change the Annual General Meeting (AGM) venue was unconstitutional; and whether Irma's (another director) potential use of company funds for personal interest constitutes a violation of the Corporations Act. The case study applies the ILAC method, referencing relevant sections of the Corporations Act and case law such as Daniels v Daniels and ASIC v Adler, to determine the liabilities of the individuals and the company. The analysis considers director duties, shareholder rights, conflict of interest, and the board's authority in decision-making. The conclusion addresses the potential for injunctions and the overall compliance with the Corporations Act.

Business law
Student details:
Case Study

Business law
Table of Contents
Issue 1..............................................................................................................................................2
Rule..............................................................................................................................................2
Application..................................................................................................................................4
Conclusion...................................................................................................................................5
Issue 2..............................................................................................................................................5
Rule..............................................................................................................................................5
Application..................................................................................................................................6
Conclusion...................................................................................................................................7
Issue 3..............................................................................................................................................7
Rule..............................................................................................................................................7
Application..................................................................................................................................8
Conclusion...................................................................................................................................9
Bibliography....................................................................................................................................9
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Issue 1
Whether the act performed by Roger stands in violation to the provisions of the Corporations Act
2001 (Cth) (“CA”) or not?
Rule
A company being a legal person is very much liable to face consequences of an offence
just like a physical person. In cases of crimes a company is liable to undergo criminal and penal
charges as may apply. But the question arises if a company can be liable for actions of its
individuals like employees and agents ( Hannigan, 2018).
As guided by section 12.2 of the Criminal Code followed by the Commonwealth, the fact
that any wrong is traced on part of a company or not is very much dependent on the performer of
the act. If the act is performed by the agent of such company during the agency period
(employment in employee’s case) then such company shall stand liable for such a wrong
committed.
Whereas as per section 12.3 of Corporations Act, the mens rea factor will be assessed by
the fact that whether or not the company expressly or impliedly authorised the agent to perform
such an act. In such cases the act will be a responsibility of the company though performed by
the agent as it shows a governance failure on part of the company ( Christensen & Kent, 2010).
Also, on the fact of it, an impression of motivation or encouragement is depicted on part of such
company.
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But reemphasising on the principle laid under Foss v Harbottle (1843) 67 ER 189, it is
only the board that can take decisions against an individual who has committed a wrong and not
the shareholders for the fact that it is board which is prime governor of the company (Bittle,
2016).
Also referring to section 181 of the CA, the director holds certain duties while acting as
one such as to act in the best interest of the company, duty to exercise ones power for legitimate
purpose and most importantly duty to avoid conflict of interest ( Hanrahan, 2013).
In the case of ASIC v Adler [2002] NSWSC 171 the court highlighted a fact that every
time a purpose is associated to any duty and such duty shall be counted as violated if no
legitimate reason stands for any other director to believe such act being in the utmost interest of
the company.
Also, when any director acts under the professional capacity, one is expected to act with
due care and avoid negligence. In the case Daniels v Daniels [1978] 2 WLR 73 where the assets
were been sold off in much lower value by the directors, the court held:
“Minority shareholders were entitled to bring a derivative action on behalf of the Co
against the directors to recover the loss sustained by the company -the difference between what
the actual worth of the company to how much it was sold for”.
Section 19(1) of CA dictates that any director who seeks an interest is bound to disclose
such interest before the board while making a contract. Or such directors are barred from
contracts that hold their personal interest ( Haque, 2010).
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Application
In the given case, Roger is one of the directors and CEO of the company. The act of
Roger of selling product to his nephew on part of the company in an undervalue price is a clear
case similar to Daniels v Daniels. Roger sold the product under a contract in a value way too
lower than actual market value.
Also, with application of section 12 Corporation Act of the act in the given scenario, the
liability of the company stands unquestioned as being a director Roger was acting as an agent to
the Company which gave Roger room to act in personal interest ( Hannigan, 2018).
But, Roger stands in doubt under personal capacity too as per section 181 of CA where
acting in a manner to attract loss to the company is a clear case of carelessness and negligence on
his part. Along with this, applying the ruling from the case ASIC v Adler the act of Roger would
never be held in interest of the company.
And as Roger entered a contract with his nephew and sold off the product of the company
is much lower prices, section 19(1) is clearly attracted which prevent the directors to get into any
contracts which includes their private interest.
Conclusion
Roger is liable to act against the provisions of Corporations Act. Also, the Company is
equally liable for the contract entered by Roger in capacity of its agent.
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Issue 2
Whether the act of Company Board in terms of changing the meeting venue was
unconstitutional under Companies Act or not?
Rule
Under the Company act, the company is usually regulated by a set of rules which are
partially alterable in nature. Some of the rules in a company can be replaced whereas few cannot
be and have to be followed as mentioned under the constitution of the company.
Under section 135(1)(a) of CA, the rules of a company can be modified or replaced as
far as their applicability on company members is concerned but might not be for the outsiders
( Kershaw, 2012). Under the act it is the board which holds a responsibility towards the
functioning of the company and not the shareholders. Laid in the case of Automatic Self-
Cleansing Filter Syndicate Co v Cuninghame [1906] 2 Ch 34 the directors are nowhere under the
official obligation to follow guidance of the shareholders and carry out functions related to the
company.
Also, in the cases like NRMA v Parker (1986) 11 ACLR 1 and Australasian Centre for
Corporate Responsibility v Commonwealth Bank of Australia (2016) FCAFC 80, the court
strictly laid the line stating that the shareholders do not hold any right in delegating any
instructions to the board as to how the board along with the management should exercise their
powers in running the company ( Latimer, 2011).
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But under section 250S and T, a reasonable and fair opportunity is provided to the
shareholders in order to pose questions ( Hannigan, 2018).
Application
In the given case, Peter being one of the minor shareholders of the company, has
challenged the act of changing the venue for the next AGM meeting on part of the board to be
unconstitutional.
Relying on the application of ruling from the case of Automatic Self-Cleansing Filter
Syndicate Co v Cuninghame in the present issue, it becomes very evident that shareholders like
Peter do not hold any room to look into the functioning of the company and it is primarily the
responsibility of the board to look into such matters (Lipton & Herzberg, 2014).
Also applying the position laid by court in the case of NRMA v Parker and in
Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia ,
shareholders like Peter are not liable to dictate the board and its management in running the
company and performing its functions ( Mallin, 2011).
Conclusion
Hence in the given case, the act of the board in changing the venue for the AGM meeting
stands in harmony with the Company Act and the constitutional facet of the company.
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Business law
Issue 3
Whether the act (to be performed) Irma in the given case stands in violation of Company
Act or not?
Rule
The main purpose of appointing the directors or authoritative individuals is to have
logical and reliable individuals who can decide on behalf of the company in its best interest. A
director being a trusted member holds a duty to work in utmost welfare of the organisation and
its workers.
The abuse of such a duty is most common in an era of greed. The fiduciary duty of the
director doesn’t remain constrained till the contractual obligation with the company ( Pieth &
Ivory, 2011). The aspect of “conflict of interest” is also reflected in any decision made on part of
the directors out of the leverage they hold in such a role and such decision is to benefit oneself.
Section 182 of CA, which mentions regarding improper use of one’s position and section
183 that defines inappropriate use of information can be effective provisions for prohibiting any
such improper use of power on the part of directors, officers or any other working members of
the company (Bittle, 2016). And such use of power directly leads to a direct gain to such member
of the company irrespective of the fact that the company incurs loss out of such an act.
Referring to case such as Furs Ltd v Tomkies (1936) 54 clr 583 , there was a misuse of
powers by the director in order to derive personal interest out of such professional capacity and
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the court held the director liable and ordered to surrender the benefits one incurred under such
motive ( Tricker, 2015).
In the terms of remedies, under section 1324, there exists a statutory remedy, under
which an offence which is specious of being committed, can be stopped prior to its
commencement. It is applicable when someone is about to commit an offence (Lipton &
Herzberg, 2014). As court decided in Airpeak Pty Ltd v Jetstream Aircraft Ltd [1997] FCA 158,
and stated under section 236(1), shareholders can opt for court’s permission to bring such
injunction against such offensive act of a director/s. But this is applicable only where despite of
knowledge the board ignores the issue.
Application
In the given case, Irma is suspected to use the company’s funds for her personal interest.
Looking into the application of section 182 along with section 183 of the CA in the given
scenario, Irma would be liable to misuse company’s assets or resources for personal profit which
are nowhere in just terms or for the direct or indirect benefit of the company ( Kershaw, 2012).
The Company and the board moreover are capable enough to mind the actions of its
member to keep the good interest of the company and its members ( Hannigan, 2018). And under
such circumstances, the company hold rights to take action against Irma.
But in the given scenario, the offence is a suspicion and laying implications of section
236(1) of the act, if the board does not act despite of Peter informing the board regarding such
misuse on the part of Irma (one of the director) then Peter holds rights as a shareholder to seek
injunction on Irma act (Sealy & Worthington, 2013).
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Conclusion
Irma is liable to face injunction proceedings and as her actions fall under the ambit of
conflict of interest, such acts are in conflict with CA.
Bibliography
Christensen , J., & Kent, P. (2010). Corporate Governance and Company Performance in
Australia. Company law and Governance, 372-386.
Hannigan, B. (2018). Company Law. Oxford: Oxford University Press.
Hanrahan, P. F. (2013). Commercial Applications of Company Law (Vol. 14). NSW: CCH
Australia Ltd.
Haque, S. (2010). Corporate Climate Change‐Related Governance Practices and Related
Disclosures: Evidence from Australia. Victoria: CPA Australia.
Kershaw, D. (2012). Company Law in Context: Text and Materials. Oxford: OUP Oxford.
Latimer, P. (2011). Australian Business Law 2012. NSW: CCH Australia Limited.
Mallin, C. A. (2011). Handbook on International Corporate Governance : Country Analysis.
Cheltenham: Edward Elgar Publishing.
Pieth, M., & Ivory, R. (2011). Emergence and Convergence: Corporate Criminal Liability
Principles in Overview. Berlin: Springer.
Tricker, R. I. (2015). Corporate Governance: Principles, Policies, and Practices. Oxford:
Oxford University Press.
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Bittle, S. (2016). Recent Trends in Corporate Criminal Liability. Policy and Practice in Health
and Safety, 1-7.
Lipton, P., & Herzberg, A. (2014). Understanding Company Law. Toronto: Thomson Reuters.
Sealy, L., & Worthington, S. (2013). Sealy & Worthington's Cases and Materials in Company
Law. Oxford: OUP Oxford.
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