Acc220 Law Of Business Associations Assessment Answers

Question: 1

Alana and David are the directors of Chocolate Cleaning Products Pty Ltd (“CCP”), a small company that manufactures biodegradable and environmentally friendly cleaning products that smell like chocolate. The shareholdings of CCP are as follows:

• 40%: Alana;
• 40%: David;
• 15%: Sol (an investor and mentor who has significant experience in the cleaning products industry);
• 5%: Max.

Max was engaged by Alana and David when they set up the company in order to draft the constitution and advise on the initial business structure. In exchange, he received a 5% shareholding in CCP. When drafting the constitution, Max included a clause in the constitution appointing himself as the company’s solicitor and that he cannot be replaced except for negligence.

Relations between Max and Alana and David have been strained of late because Alana and David are taking Sol’s advice in regards to proposed expansion activities. Max thinks that Sol’s recommendations are generally shady, but Alana and David are unswayed. Eventually Sol recommends that they fire Max as company solicitor and engage someone with more experience.

In addition, David and Alana call a general meeting and pass a special resolution to alter CCP’s constitution, inserting a new clause giving the board the right to expropriate the shareholdings of members owning less than 10% of the total shares issued.

Q1: Advise Max as to whether he is able to:

1. a) enforce the clause in the constitution making him the company solicitor, and what type of remedy he would need to seek if he could; and
2. b) prevent the inclusion of the clause allowing the directors to expropriate his shares, even though the other shareholders have passed a special resolution.

Question: 2

Aussie Boats Ltd (“AB”) is a listed public company that has been supplying custombuilt boats to the Australian market for the past 25 years. Its customer base has been gradually decreasing due to increasing competition for larger luxury yachts with hi-tech fit-outs made by other companies such as Millionaires on Water Ltd (“MWB”). AB had been planning expansion activities into international markets for a number of years but has held off due to lack of funds. They have had some initial discussions with boat consultancy firm La La Loopsy Pty Ltd, but again, have not had the funds to engage them for a full report and recommendations.

The board of AB is made up of Clancy (who is the managing director/CEO), Jack (the Chief Financial Officer) and three non-executive directors, Henry, Banjo and Matilda (the chairperson). At a board meeting held in July 2017 the directors expressed their concerns about the difficult financial future facing AB, as well as their deteriorating market share. In addition, Clancy and Jack had received notice that MWB had been buying up stock in AB and now owned 35% with a planned takeover bid imminent.

On the 15th of July, the board resolved to issue $1.5million of shares as follows:

• $500,000 of shares to La La Loopsy Pty Ltd, in return for the provision of a report on opportunities for AB to supply boats internationally;
• $1 million of shares to the public to be issued for the purpose of raising additional capital for expansion purposes. The minutes of the meeting reflected as the reasons for this decision that:

1. It is in the best interests of AB that it immediately engages in previously planned expansionary activities so as to improve market share;
2. That such expansion should be informed by high-quality consultancy and market research.

The new issue of shares was completed in September. After the new issue, MWB’s stake in AB was reduced to 18%.

Banjo, one of the non-executive directors of AB, disagreed with the resolution and issue of shares, believing that it would be better to enter into discussions with MWB around the terms of the take-over. He believes that Clancy and Jack are acting purely out of concern for their own positions as MWB is known to terminate the positions of executive directors after completing a take-over (whilst generally retaining non-executive directors).

Q2: Advise Banjo as to whether the directors have breached their equitable and/or statutory duties to AB (including any remedies or penalties that might be applicable).

Question 1

In this case, company appointed Max as its solicitor by stated clause in the constitution, but after sometime both Alana and David decided to remove Max as company’s solicitor because of some issue arise between the three. Special Resolution is passed by the Alana and David in general meeting for the purpose of making modification in the company’s constitution for below stated purpose:

Part A- for removing the Max as solicitor of the company.

Part B- for included the clause in the company’s constitution related to the expropriation of shares of those members who holds less than 10% shares in the company.

Part A- Whether it is possible for Max to enforce the clause written in the constitution of the company, as this clause makes him the company’s solicitor?

Part B- Whether it is possible for max to prevent the other members of the company from adding new clause in the company’s constitution related to the expropriation of shares of those members who hold less than 10% shares?

Introduction: statutory remedy is provided to the members of the company in case of oppression, and these remedies are stated under section 232 and 233 of the Corporation Act 2001. It must be noted that these remedies are present only for members of the company, and this was stated in case law Re Spargos Mining NL (1990) 3 ACSR 1.

Power to make order under section 233 of the Corporation Act 2001 is imposed under the Court through section 232 of the Corporation Act 2001, if conduct of the company related to any matter of the company, any act which is actual and proposed, or any omission on the part of the company or on behalf of the company, or members or class of members passed any resolution or give proposal of any resolution is either contravenes the member’s interest in the company, oppressive or unfair against any member of the company.

As stated above, court has power to make order under section 233 of the Act, and section 233 states that court can make following orders:

Court can make order related to winding up of the company.

Court can make order to modify and repealed the present constitution of the company, and Court can make regulation in relation to future conduct of the affairs of the company.

Court can make order to buy the company’s shares by any member who get the shareholding in the company by will or by operation of law. Court can make order to buy the company’s shares in lieu of appropriate share capital reduction.

Court can order the company to initiate, prosecute, defend, and stop any legal proceedings, and Court can give authority to any member or any other person who holds ownership in the company by way of transmission, to initiate, prosecute, defend and discontinue any legal proceedings on company’s behalf or in the company’s name.

Court can make appointment of any receiver in lieu of any specific property or all of the company’s property.

Court can restrict any person to conduct any specific action or from doing any act, and Court can order any specific person to engage in any particular act.

Section 233 also defines that Court has power to make order for the purpose of make alterations in the constitution of the company. If any order is made by the Court under this section in lieu of repeal and modification of the constitution then company’s power stated under section 136 is restricted if any changes done by the company in the constitution contravenes the order made by Court, unless:

• Order made by the Court specifically contains the provision that company has power to make changes and repeal the constitution.
• Court leave is obtained by the company.

If conduct of the company or person which is in question is define under section 232 (a), (b) or (c) of the Corporation Act 2001, then for seeking relief under section 233 of the Act, person must prove that:

• Matter which is in question contravenes member’s interest under section 232(d), and it must be noted that it generally happens when directors of the company breach their duties.
• Matter which is in question is oppressive and unfair in lieu of member’s interest under section 232(e).

It must be noted that even single shareholder has right to bring application to Court for making order under section 233, and this was stated in case law Gooze v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534. Therefore, Max has power to make application to Court under section 232.

After considering the above facts of the case, it is clear that order can be made by the Court under section 233 of the Act for the purpose of restricting the power of company under section 136 of the Act because modification stated in part A and B clearly satisfied the provisions of Section 232 of the Act. In case Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042, Court stated that narrow interpretation was done related to any conduct, and they give emphasis to the nature of the conduct and not to the effect of the conduct.

Section 232 states that, if members or class of members passed any resolution or give proposal of any resolution which contravenes the member’s interest in the company and oppressive or unfair against any member of the company. In this case both Alana and David pass resolution in the general meeting, and this satisfied the provisions of section 232 of the Act. However, it is not necessary that directors breach their duties to get remedy under section 232of the Act, and this was stated in case law Wayde v NSW Rugby League [1985] HCA 68. Therefore, Max can seek for remedy provided to minority shareholders under Section 233 of the Act.

Conclusion: Max can use his power to seek remedy under section 233 of the Act and restrict the power of Alana and David under section 136.

Question 2

In this case, company registered in Australia named as Aussie Boats Ltd (“AB”) and it is also a listed company. Company is facing financial issues from last few years. One more company named as Millionaires on Water Ltd (“MWB”) is purchasing the shares of the company from the stock market for the purpose of take over the AB. Both the executive directors of the company that are Jack and Clancy decided to issue new lot of shares for the purpose of reducing shareholding of MWB in the company, because both the directors do not want that MWB takeover the AB. Directors does not want takeover because they know if MWB takeover the AB then MWB remove them from the position of the director.

Whether any statutory and general duty imposed by Corporation Act 2001 on directors is breached by company’s directors that are Clancy and Jack?

Duties of directors are mainly considered in case law Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023 under section 180 and 181.

Numbers of statutory and general duties of directors are introduced by corporation Act 2001 for directors of the company under section 180, 181, and 182 of the Act. Duties stated under these sections are defined below:

Duty to act with due care and skill- this duty is define under section 180 of the Act, and as per this section directors of the company are under obligation to conduct the affairs of the company with due care and skill. It must be noted that this duty of director is also considered as fiduciary duty of the director because directors own fiduciary relationship with company and its members.

Clause 2 of section 180 also imposed duty on director related to business judgment, which means directors of the company are under obligation to make any judgment related to the business with due care and skill. In other words director must take judgment in good faith and in best interest of the company.

Duty to act in good faith- this duty of director is stated under section 181 of the act, and as per this section directors of the company must compile their actions:

• In good faith.
• In the best interest of the company,
• And for proper purpose.

However, if clause 1 of this section is contravene by any person then it is considered that person contravenes complete section.

It must be noted that both above stated sections that are section 180 and 181 of the Act are considered as Civil Penalty provision under section 1317E.

Not to take advantage of position- this duty is imposed by section 182 of the Act on directors of the company. As per this section of the Act any director, officer, or secretary of the company is under obligation to ensure that position hold by them is not used for gaining advantage for themselves or for any other person or for causing any loss to another person. This section is considered as Civil Penalty provision under section 1317E.

Section 1317E of the Act provides remedies, and as per this section if any officer or director of the company contravenes the provisions of above stated sections then court can make order related to declaration of contravention. After making the declaration of contravention by Court, ASIC can seek pecuniary order under section 1317G and disqualification order under section 206C of the Act.

Banjo, non-executive director of AB stated that decision taken by Jack and Clancy is not in the best interest of the company but it is in the interest of the director. In case Asic v Adler and 4 Ors Court decided that all three directors of the company that are Fodera, Williams, and Adler breach their duties under section 180, 181, and 182 of the Act because all three directors fail to act in best interest of the company and in good faith. Court further stated that material personal interest was hold by the Adler in the business judgment. Court stated that both William and Fodera also breached their statutory duties they owed towards the company as William fails to take judgment in good faith and in the best interest of the company and Fodera does not inform other members of the Board about the judgment taken by them. Therefore, all three directors of HIH breach their statutory and equitable duties under the Corporation Act 2001, and this breach result in collapse of HIH because of which directors face consequences stated in section 1317E.

After considering the facts of this case, it is clear that Jack and Clancy breach their statutory and equitable duties under the Corporation Act 2001, and this breach result consequences stated in section 1317E. Both Jack and Clancy can face below stated consequences:

• Court can make order for paying compensation in lieu of damages under section 1317H.
• Court can make pecuniary order under section 1317G.
• Court can disqualify the directors of the company from managing the company under section 206C of the Act.

Conclusion: In this case, both Clancy and jack breach their duties under section 180 and 181 of the Act because they fail to make business judgment in the best interest of the company, and this breach result consequences stated in section 1317E. Both Jack and Clancy can face below stated consequences:

• Court can make order for paying compensation in lieu of damages under section 1317H.
• Court can make pecuniary order under section 1317G.
• Court can disqualify the directors of the company from managing the company under section 206C of the Act.

References

Corporation Act 2001.

Re Jermyn Street Turkish Baths Ltd [1971] 1 WLR 1042.

Asic v Adler and 4 Ors [2002] NSWSC 171.

Wayde v NSW Rugby League [1985] HCA 68.

Gooze v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534.

Re Spargos Mining NL (1990) 3 ACSR 1.

Australian Securities and Investment Commission (ASIC) v Cassimatis (No. 8) [2016] FCA 1023.

Ahern Lawyers. Statutory Oppression Remedy Under the Corporations Act 2001 (cth). Viewed at: https://www.ahernslawyers.com.au/latest-news/statutory-oppression-remedy-under-the-corporations-act-2001-cth/. Accessed on 28th September 2017.

AICD. General Duties of Directors. Viewed at: https://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-responsibilities/general-duties-of-directors. Accessed on 28th September 2017.