D26 : Business Law : Assessment Answers

1. Gary is a retired director who still attends directors meetings as an advisor to the company, and always discusses issues with the other directors, who usually follow his advice. Gary has the job of purchasing equipment for the company, however, under the rules of the company every director must get board approval before purchasing items over $3,000 for the company. It appears that Gary has contracted to purchase a number of items, which are well over $1m, which is more than the company can pay. The company appears to be unable to pay the debts that Gary is created, and the company might need to be wound up. What is Gary's position in the company? Is the company liable for the debts created by Gary? Can the creditors sue Gary if the company is wound up? What should the company do if it thinks it is insolvent.

2. A company is planning to pass a resolution to force a number of shareholders to sell their shares back to the company. These are small shareholders who never attend meetings. Many of those shareholders do not want to sell their shares, or have them confiscated. There are 5 shareholders who are the majority shareholders, and they have the power to pass any resolution put. It appears that the directors have also been removing property from the company for their own use.
What are the rights of these shareholders in this situation? Can the shareholders stop the resolution, and what about the majority directors misusing their power to take property? The minority shareholders, can they take legal action against the directors?

Answer:

1). As per the details provided via the facts in question 1 Gary will be considered as the director of the company. This is because of the application of section 9 of the Corporation Act 2001 (Cth). The section defines a director as an person who controls the functioning of the business. in the given situation it is clear that Gary is controlling the functioning of the company as the directors mostly follow his decisions and he has the role of purchasing equipments for the company even where he is a retired director. Thus Gary is a director of the company.

All directors are the agents of the company as stated by the provisions of section 125 of the CA. Thus they have the right to bind the company to any contract being the agents of the company. Thus in the given situation as Gary is the director the company will be bound by the contract in relation to the equipment purchase. In addition as per section 124 an act is not invalid if it is contrary to the constitution. Thus the restriction of purchasing over one million will also not make the contract invalid.

The directors of the company will not be liable personally because of the provisions of limited liability. However in certain situation they can be liable personally which such as the breach of section 588G (3). This is when the directors have involved in insolvent trading intentionally. However, here no intentional insolvent trading has been done so Gary cannot be sued personally.

In case the company thinks it has become insolvent it may apply for the appointment of an administrator or a liquidator under the CA.

2). In the given situation the minority shareholders can make a derivative action claim against the directors of the company which has been provided via the provisions of section 232-234 of the CA. It has been provided by the provisions of section 233 of the CA that in case the directors of the company are taking an action which is prejudicial to the management of minority shareholders of the company an action can be made by such shareholders of the company. Under section 233 only the minority shareholders can ask the court to issue an injunction which the court would pass if it is satisfied that the actions taken by the directors are prejudicial to the interest of the minority shareholders of the company. It is also provided by the provisions of section 181 of the CA that the director of the company has to act in the best interest of the company and for a proper purpose of the company. Here the facts provide that the directors of the company have misused their powers which is not for the proper purpose of the company. Thus in this case it can be sated that the majority directors are also in breach of the duty of good faith and proper purpose. It can be concluded that the minority members can take a derivative actions against the directors.

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