Analyzing the Legal Regulation of Business Structures: A Case Study

This case study delves into various legal aspects of business structures, analyzing scenarios involving company constitution changes, breach of contract, and directors' duties under the Corporation Act 2001. It examines a situation where a director attempts to alter the company constitution to expropr...Read More

Legal Regulation of Business Structures
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Contents
Question 1..................................................................................................................................3
A. Recommend Salman, what the procedure for changing a company constitution is, and
whether she can prevent the inclusion of the section allowing the directors to expropriate her
shares?........................................................................................................................................3
B. Recommend Melanie, what alternative, if any, she has for the non-payment of her monthly
payments for the rest of her 12 month contract?........................................................................4
Question 2..................................................................................................................................5
A. Counsel Archibald whether the directors of Chip-Eze Pty Ltd have breached S 181 of the
corporation act 2001 (Cth) or the equivalent equitable duties and what penalties or remedies
might be relevant........................................................................................................................5
B. Advise Faizah whether she has an action against Jordon for breach of directors’ duties for
selling her the shares in Chip-Eze Pty Ltd just prior to it was going into liquidation...............7
Reference List............................................................................................................................9
2

Question 1
A. Recommend Salman, what the procedure for changing a company
constitution is, and whether she can prevent the inclusion of the section
allowing the directors to expropriate her shares?
The directors of the company decided to change the company constitution in this case to buy
back shareholdings that are less than the amount of 12 per cent and as Salman had 10 per cent
shareholding her status of shareholder was being purchased back by the organisation. In this
section the method of changing of constitution in a company under the Company Act 2001 is
going to be discussed. The exploration of this section is going to serve as a basis of advice for
Salman regarding her possible efforts that can help in the prevention of the change in the
constitution. It is notable to mention that the directors of the company Astounding gifts Pty
ltd decided that Salman who is an employee of the organisation was going to be provided
with 10 per cent of shareholding within the organisation1. The conflict arose when the
directors gathered information regarding the fact that Salman also took job position as an
accounted in a rival organisation that is Gifts Pty Ltd. Moreover there was also information
regarding the fact that she was trying to act against the interest of the company by trying to
persuade the chief supplier of the organisation Malanie. Malenie was a local handmade craft
gift designer who was the chief supplier of the organisation.
There is a certain process for changing the constitution within an organisation as par the
Corporation act 2001. The constitution of a company is served as the primary contract
between all the individuals working within the organisation. However there are choices of
either having a constitution or a replaceable rule. But as par the case study there is clear
evidence that the organisation has formed its constitution2. After the formation of a
1 Hanrahan, P.F, I. Ramsay and G.P Stapledon, Commercial Applications Of Company Law /
Pamela Hanrahan, Ian Ramsay, Geof Stapledon. - Version Details (2014) Trove
2 Clarke, Thomas, The Evolution Of Directors Duties: Bridging The Divide Between
Corporate Governance And Corporate Social Responsibility - Thomas Clarke, 2007 (2007)
3

constitution any change in the constitution can be made after a notice of 21 days as it is a Pty
Ltd company. At least 75 per cent of the votes have to be in favour of making the change.
Salman is a 10 per cent shareholder of the organisation and as mentioned before after the
formation of a constitution to make any alteration in it there has to be a 21 days’ notice that
has to be provided to each of the stakeholders of the organisation 3. So intimation has to be
given to Salman before any change was to be made but the change in the constitution was
done by the directors immediately without giving any information to Salman. Salman also
has a voting right in the proposed alteration however this is not going to be effective in this
case because 75 per cent of votes are only required for the implementation of any change and
as both the directors Kody and Ryder holds 45 per cent of the share each they are likely to be
able to successfully pass their resolution4.
B. Recommend Melanie, what alternative, if any, she has for the non-
payment of her monthly payments for the rest of her 12 month contract?
Melanie is the chief supplier of the organisation. A contract was formed between Melanie and
Ryder for supplying of her gifts and handmade crafts for a period of 12 months in exchange
of a monthly payment of $ 5000. This contract was signed on 26th of April 2018. The contract
was formed between Ryder, the director of the company and 45 per cent shareholder of the
organisation and Melanie. From the 12th of May 2018 they started their monthly payment. On
12th of July they were informed regarding the breach of contract on the part of Melanie. They
were as informed that Melanie on provocation of Salman was also supplying product to a
rival company even though she was in an exclusive contract agreement with the
3 Waring, P, Directorship And Officer Services (2018) Tmf-group.com <https://www.tmf-
group.com/en/services/companies/corporate-secretarial/independent>
4 MARSHALL, SHELLEY and IAN RAMSAY, STAKEHOLDERS AND DIRECTORS’
DUTIES: LAW, THEORY AND EVIDENCE (2012) austlii.edu.au
<http://www.austlii.edu.au/au/journals/UNSWLJ/2012/12.html>
4

organisation5. They decided to stop further payment from 12th July onwards for the rest of her
time.
As the nature of the contract of Melanie with Ryder director of Astounding Gifts Pty Ltd was
exclusive contract hence supplying of product to any other organisation is clearly going to be
considered as a breach of contract. But in this case there is no evidence that Melanie has
started to supply her products to the competing organisation. The report in this regard was
that Salman was ‘trying to encourage Melanie’ for the change in the supply of the products to
its rival organisation. However there is no report of the event that Melanie has broken the
contract and started supplying to its rival organisation 6. Hence in this situation the decision
regarding the stopping of payment is going to be considered as a violation of contract on the
part of the organisation that is Astounding Gifts Pty Ltd. The breach of contract terms occurs
when one party stops conducting their part of the duty even when the other party has not
ceased to perform their side of the duty. The legal remedy for direct breach of contract can be
availed by Melanie in this case against the Astounding Gifts Pty Ltd . The stopping of further
payment by the organisation has been done on the basis of an assumption and without
concrete evidence and has been done without making any prior communication with the other
party involved in the contract. Even if the accusation has to be taken into consideration it is of
importance on the part of the organisation to make an oral or written contract with the
supplier or at least they should have provided with a letter of communication citing the
reason for the stopping of further payment. This can also be cited against the organisation7.
So considering this situation the key advice for Melanie in this situation is that she should
5 Veult, La Reyne le, Constitute The Commonwealth Of Australia. (2018)
Foundingdocs.gov.au
<https://www.foundingdocs.gov.au/resources/transcripts/cth1_doc_1900.pdf>
6 Keay, Andrew and Routledge Cavendish, Company Directors' Responsibilities To Creditors
(Paperback) - Routledge (2018)
7 THE AUSTRALIAN LEGAL SYSTEM (2010) Lib.oup.com.au
<http://lib.oup.com.au/he/samples/ciro_LAB4e_sample.pdf>
5

make a communication on her part with Ryder who is the director and majority shareholder
of the company regarding her entire perspective regarding the situation as the contract was
formed between Melanie and Ryder. In case Ryder refuses to make a compensation for the
breach of contract and establish their original contract term than Melanie can take legal action
against Ryder for an actual breach of contract8. This may result in the reestablishment of the
contract and/or payment of the tenure in terms of civic penalties on Ryder.
Question 2
A. Counsel Archibald whether the directors of Chip-Eze Pty Ltd have
breached S 181 of the corporation act 2001 (Cth) or the equivalent
equitable duties and what penalties or remedies might be relevant
Corporation act 2001, section 181 discusses the duties and responsibilities of the directors of
a business organisation. The statute and general rule decides on the duty of the organisation.
The genesis of the duty decides on the different remedies. The company and directors
relationship is considered as a fiduciary relationship and thus there are high standards of
loyalty that is expected from the organisation9. the chief duties under the loyalty of the
organisation involves working for the best interest of the organisation, giving proper
importance regarding taking decisions on behalf of the organisation, to serve to fulfil the
corporate purposes of the organisation etc. the section 181 of the Corporation Act 2001
reinforces these duties of the organisation.
In this situation the Chip-Eze Pty Ltd which has two segments of business that is production
of potato crisps and frozen snack food business. The potato crisp manufacturing side of the
8 Gutiérrez, María, An Economic Analysis Of Corporate Directors' Fiduciary Duties On
JSTOR (2003) Jstor.org <https://www.jstor.org/stable/1593744?
seq=1#page_scan_tab_contents>
9 Holland, Randy J., DELAWARE DIRECTORS’ FIDUCIARY DUTIES: THE FOCUS ON
LOYALTY (2008) Scholarship.law.upenn.edu
<https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1334&context=jbl>
6

business has been suffering from financial losses because of their outstanding to the suppliers
10. The director of the organisation prior to the liquidation of the company separated the two
businesses in forming two different organisations. This was done by the director of the
organisation for the purpose of saving the profitable business from being impacted by the non
profitable side of the business.
The decision of the director Micheala of the organisation in this scenario can be considered to
be in the best interest of the business. However there is a grey area in this situation. Director
Micheala of the Chip-Eze company took the decision of formation of a new company in order
to save the business can be considered as a right decision but cannot be considered as a right
decision for the organisation that is Chip-Eze Pty Ltd11. Again considering the fact that the
organisation was going through a financial crisis which may have resulted in the liquidation
of the organisation in such situation the frozen food business would also had been sold for the
repayment of the debts of the suppliers of the potato manufacturing section. This would result
in more harm of the business. So the formation of the Freeze Me Pty Ltd for the purpose of
the ultimate gain of the business can be observed in the activity of the director Micheala 12.
Apart from that the director of the organisation has also ensured that the customers and the
supplires of the organisation has also been informed regarding the possible changes. Thus
business apart from the name of the organisation has been protected.
Director Jordon who held 25 per cent of shares of the organisation 2 days before the
formation of a different company sold 5 per cent of shares that was held by him to one of the
outside investors Faizah. Later on the business ended up in insolvency. So the act of the
10 Anabtawi, Iman, Fiduciary Duties For Activist Shareholders (2018)
11 Veult, La Reyne le, Constitute The Commonwealth Of Australia. (2018)
Foundingdocs.gov.au
<https://www.foundingdocs.gov.au/resources/transcripts/cth1_doc_1900.pdf>
12 Hazen, T.L and L.L Hazen (2013) Scholarship.law.upenn.edu
<https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=https://www.google.com/
&httpsredir=1&article=1404&context=jbl>
7

director who was aware of the insolvent condition of Chip-Eze Pty Ltd as Micheala had the
discussion regarding the formation of a new company on 1st August in that year. But Jordan
sold 5 per cent of his share to the outside investor Faizah on 8th August of the same month.
The director of the organisation according to the civil obligation should make adequate
consideration before a making a decision. The director of the organisation is also responsible
to the shareholders of the organisation. The director is responsible for the money of the
shareholder and the director should not treat with bias to any particular shareholder. in this
case Jordon was director and shareholder of the company and thus the information that was
available to him was misused by him for the purpose of selling some of his shares to an
outside shareholder13. This action is done for the purpose of personally gaining as a
shareholder. The general legislation and torts can likely be used in this situation. Jordon also
kept this transaction as a secret from the rest of the directors of the organisation. Hence this
act can be considered to be a violation of the duties of the director. The shareholder in this
case can ask for a windfall remedy in which the benefits that is gained by the director because
of the breach of duty can be claimed by the shareholder. The section 181 (b) which states that
the director should exercise his or her power for a proper purpose has been stated. This
section has been violated by the director in this case. The punishment for the violation of this
section can result in formation of criminal charges against the person and can be made liable
for civic penalties amounting up to $ 220,000 and imprisonment of sentences up to 5 years.
B. Advise Faizah whether she has an action against Jordon for breach of
directors’ duties for selling her the shares in Chip-Eze Pty Ltd just prior to
it was going into liquidation.
Faizah who is an external shareholder of the organisation showed interest in buying shares of
the company Chip-Eze Pty Ltd to one of its directors that is Jordon. Jordon who is director as
well as 25 per cent shareholder of the company agreed to sell 5 per cent of shares from his
part to Faizah. The exchange to shares took place two days after which the profitable part of
the company that is the frozen snack part was separated in forming a different company
called the Freeze me Pty Ltd of which Jordon was a part. This decision was taken by the
organisation citing the financial issues that were faced by the Chip-Eze Pty Ltd. The
13 Bottomley, Stephen, The Constitutional Corporation: Rethinking Corporate Governance
(Hardback) - Routledge (2018)
8

inevitability of the dissolving of the company occurred sometime after the separation of the
company profitable part of the company 14. The creditors of the Chip-Eze Pty Ltd applied for
the repayment of the debts and as a result the company was liquidated. In this case Jordon
didn’t inform the shareholder Faizah regarding the financial issues that are faced by the
company.
Section 182 (a) of the Corporation Act 2001 states that a director should not make use of the
position that is held by him or her for taking advantage for themselves or someone of their
acquaintance. But in this situation as the director is himself the shareholder as well had the
advantage over the external investor. Jordon was aware of the decision regarding the poor
financial performance of Chip-Eze Pty Ltd and the decision that was taken inclusively by all
the directors for separating the profitable frozen snack section of the company under a new
organisation that is Freeze Me Pty Ltd. This information was withheld by Jordon from
Faizah. The question regarding the breach of section 182 (a) occurs because of the fact that
the 5 per cent share that Faizah wanted to buy was supplied by Jordon from the 25 per cent of
the shares that was personally owned by him 15. This decision has caused personal benefit of
the director because Chip-Eze was a loss making company and was about to be liquidated
and thus by selling off his shares Jordon was able to reduce the amount of loss that he was
about make because of holding of the shares. The withholding of the information was not the
breach of this section but selling of his particular shares instead of making the rest of the
directors aware of the demand that was made by Faizah is where the withholding of the
information was done by the director for the purpose of making personal gain 16. Thus it can
be said that Faizah can take action against Jordon under section 182 (a) of Corporation act
14 Gorris, J.M, L.A Hamermesh and L.E Strine, APPRAISAL REMEDY IN DELAWARE EN
VERGELIJKING MET EUROPESE EQUIVALENTEN (2017)
15 Rutledge, Thomas E. and Thomas Earl Geu, The Analytic Protocol For The Duty Of
Loyalty Under The Prototype LLC Act (2010)
16 McKendrick, Ewan, Contract Law (2014) global.oup.com
<https://global.oup.com/academic/product/contract-law-9780198808169?lang=3n&cc=nl>
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2001 for breach of directors duties for selling her shares in Chip-Eze Pty Ltd before the
company went to liquidation.
10

Reference List
Anabtawi, Iman, Fiduciary Duties For Activist Shareholders (2018)
Scholarship.law.cornell.edu <https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?
article=1825&context=facpub>
Bottomley, Stephen, The Constitutional Corporation: Rethinking Corporate Governance
(Hardback) - Routledge (2018)
Clarke, Thomas, The Evolution Of Directors Duties: Bridging The Divide Between Corporate
Governance And Corporate Social Responsibility - Thomas Clarke, 2007 (2007)
Esser, I. and JJ du Plessis, The Stakeholder Debate And Directors' Fiduciary Duties(2007)
http://dro.deakin.edu.au <http://dro.deakin.edu.au/view/DU:30007411>
Gorris, J.M, L.A Hamermesh and L.E Strine, APPRAISAL REMEDY IN DELAWARE EN
VERGELIJKING MET EUROPESE EQUIVALENTEN (2017)
Gutiérrez, María, An Economic Analysis Of Corporate Directors' Fiduciary Duties On
JSTOR (2003)
Hanrahan, P.F, I. Ramsay and G.P Stapledon, Commercial Applications Of Company Law /
Pamela Hanrahan, Ian Ramsay, Geof Stapledon. - Version Details (2014)
Hazen, T.L and L.L Hazen (2013) Scholarship.law.upenn.edu
<https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=https://www.google.com/
&httpsredir=1&article=1404&context=jbl>
Holland, Randy J., DELAWARE DIRECTORS’ FIDUCIARY DUTIES: THE FOCUS ON
LOYALTY (2008) Scholarship.law.upenn.edu
<https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1334&context=jbl>
Keay, Andrew and Routledge Cavendish, Company Directors' Responsibilities To Creditors
(Paperback) - Routledge (2018)
Keay, Andrew, Company Directors' Responsibilities To Creditors (Paperback) -
Routledge (2007)
11

MARSHALL, SHELLEY and IAN RAMSAY, STAKEHOLDERS AND DIRECTORS’
DUTIES: LAW, THEORY AND EVIDENCE (2012) austlii.edu.au
<http://www.austlii.edu.au/au/journals/UNSWLJ/2012/12.html>
McKendrick, Ewan, Contract Law (2014) global.oup.com
<https://global.oup.com/academic/product/contract-law-9780198808169?lang=3n&cc=nl>
Roberts, William, William Roberts Lawyers - William Roberts Lawyers (2018)
Williamroberts.com.au <https://www.williamroberts.com.au/>
Rutledge, Thomas E. and Thomas Earl Geu, The Analytic Protocol For The Duty Of Loyalty
Under The Prototype LLC Act (2010)
Steps To Register A Company | ASIC - Australian Securities And Investments
Commission (2018) Asic.gov.au
<https://asic.gov.au/for-business/registering-a-company/steps-to-register-a-company/>
THE AUSTRALIAN LEGAL SYSTEM (2010) Lib.oup.com.au
<http://lib.oup.com.au/he/samples/ciro_LAB4e_sample.pdf>
Veult, La Reyne le, Constitute The Commonwealth Of Australia. (2018)
Foundingdocs.gov.au
<https://www.foundingdocs.gov.au/resources/transcripts/cth1_doc_1900.pdf>
Waring, P, Directorship And Officer Services (2018) Tmf-group.com <https://www.tmf-
group.com/en/services/companies/corporate-secretarial/independent-directors/?
gclid=Cj0KCQjwrszdBRDWARIsAEEYhrditKCmXOI2YGlb15qOepQcIUv1WHu2Tftq848
FoArnr0M0fbbKu0waAliUEALw_wcB>
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