LAWS2301 Company Law-Section 588G of an Act

Jamie and Paul are the directors of a small Company, Madyou Pty Ltd, which runs a small business videoing wedding and birthday celebrations.  Paul's friend Irene often lines up contracts for the business, oversees the books and gives general day to day advice about which jobs to do and what price to charge.

In November, due to some stiff competition from a new business called Tarantino Pics Pty Ltd, Madyou starts to experience financial troubles.  The rent on the office is overdue by 6 weeks and several suppliers have outstanding bills of several weeks.    On Irene's advice, Madyou  signs a contract with a local bridal magazine for 6 months worth of glossy page long adverts at a total cost of $18,000. This was hoped to bring in more business.

In April, the business deteriorated even further.  The rent was now over 6 months overdue and a long list of bills had not been paid.  On May 2nd the company went into liquidation without having paid for the advertising.

Advise Jamie and Paul on their personal liability for the outstanding debts.  Is there anyone else who might be personally liable

Zapati & Sons Pty Ltd is a family company carrying on the building business commenced in 1959 by Mr Abe Zapati.  The original shareholders were Abe (25%) and his three brothers Bert (25%), Charles (25%) and Dave (25%).  All four brothers were actively involved in the building business.

 Abe and Charles are the two directors and they effectively run the company.  In 1990 Dave died and his shares were inherited by his son Percy, a geologist.  Abe and Charles run the business conservatively and tend to `plough back' profits into the business, so that dividend payments are lower than they could be.  Percy is presently unemployed and relies on his dividend payments to live.  At a general meeting he tried to change the dividend policies of the company but was outvoted by the others.  He would now like to sell his shares in the company (worth about $100,000) but there is a clause in the memorandum prohibiting shares being sold outside the Zapati family.  None of the other Zapatis wish to buy Percy's shares. 

Lee Chan owned a market garden business near Perth.  In December 2006, Lee decided to incorporate.  On 2nd January 2007, Chan and Co Pty Ltd was incorporated, and took over the family business.  The property on which the market gardens are situated, was transferred from Lee to Chan and Co Pty Ltd three months after incorporation.  The consideration was $210,000.

The shareholders consist of Lee, members of his immediate family, and more distant relatives.  There are three directors, Lee's wife, Mary, and Lee's two brothers.  Mary is the managing director and is largely responsible for running the business.

The company's constitution includes the following provision:

"No director shall enter into a contract for an amount of more than $10,000 on the company's behalf without the agreement of at least two thirds of the directors."

In February this year, unbeknown to the board of directors, Mary entered into a contract with Wagmores Ltd, a farm machinery manufacturer, for the purchase of a trailer.  The contract price was $12,000, and the contract was signed by Mary "as managing director, and on behalf of, Chan and Co Pty Ltd".

Lee's niece, Mee-Ling, is a minor shareholder in Chan and Co Pty Ltd and a second year Commerce student.  She has recently discovered some land valuations of the company's market garden property which would suggest that the land Lee transferred to the company was worth no more than $180,000 at that time.

Advise the respective parties of any rights and/or liabilities arising from the above facts.

Mick is company secretary of Export Advisers Pty Ltd, a small company which provides advice to would-be exporters about trade conditions applicable to the country in which their clients wish to establish an export business, and provides lists of potential importers in the country involved.

In August, Chris, the managing director of Engine Power Pty Ltd, a company which manufacturers motor launch engines, approached Mick about Export Advisers providing Engine Power with a list of potential importers in Indonesia, their target export market, and advice as to the best method to approach those on the list.

The director of Export Advisers who usually advised clients about Indonesia and Asia generally, was on holidays at this time and Mick had been instructed to refer any enquiries to Sue, Export's European adviser.  Mick decided to prepare the advice himself as he had visited Indonesia on a number of occasions and considered himself quite knowledgeable about market conditions there.  Mick's advice was delivered to Engine Power on the 15th September.

It now transpires that the list prepared by Mick failed to identify the most likely importer, and that Engine Power's main rival has concluded an agreement with that importer which will effectively exclude any other motor launch engine exporters from the Indonesian market.  Chris has advised Export Advisers that his company intends to sue for breach of contract.  Export maintains that Mick had no authority to make the contract or carry out the work and intends to defend the action on that basis. 

Tim, Lisa and Kate own shares in Homebake Pty Ltd.  Tim and Lisa are directors with Lisa being appointed the Managing director. Carol is the company secretary  and Megan is an employed chef.  Discuss the company's liability with respect to each of the following contracts:

Answer:

The corporation act, 2001 state the general rule that the every director of the company prohibit to trade while insolvency as contemplated under section 588G of an Act. In this case, Jamie and Paul are personally liable to pay outstanding debts as trade in losses. In the context of present problem, the reason set out that they breach the duty of care and diligence under section 180 and also they also step in a contracting with a third party without any understanding that the performance of the business is also affected if they contract with other party, consequently breach the duty to owe toward third party. The insolvency shows by the existing ground of “reasonable suspicious”.

The case referred in the present response to the problem is that in which court held that every director must owe with third party while contracting.

 Moreover, the present case also represents the liability of Irene, friend of the director. The case, referred in the response to the problem is that any person other than director of the company can also be personally liable to pay debts as it influences the opinion of the directors completely. Such advice results into insolvency of the company.

The appropriate response to the problem is that Percy can enter into an agreement of sale share agreement under 568(1AA) of corporation act, 2011.  The following merits lies in favor of Percy to execute agreement on selling share:

• The two directors namely Abe and Charles having prejudiced interest.
• Percy is unnoted by several other members of the company.
• The agreement can be executed as Percy is not having sufficient means to survive.
• No adequate payment of dividends made in favor of Percy after tax profits.

The case referred state that every shareholder of the company is liable to maintain obligations and favorable interest in context of company’s shares before any undertaking of transactions for dividends and profits.

Therefore, the prohibited clause of the company shall not infringe the provisions of share sale agreement.

The following rights and liabilities of shareholders as per facts of the problem-

• The shareholders are entitled to take decisions about the company affairs in its meeting by passing a resolution on the majority of the other shareholders. Moreover, the respective shareholders of the present case were entitled to know every basic information or knowledge like a dealing of any contract or agreement with third party.
• In this present case, the managing director breached its fundamental duty toward and its members. Such managing director, Mary is liable to civil penalty as he failed to take consents of the members of the company.

In case , the doctrine of ultra vires discusses in the context of protection of shareholder’s rights and liabilities in case where director conceal any fact of the contract with third party. Here in this case, the court held that director who enters into contract without the consent of constitution of the shareholders shall be liable to civil penalty on ground of its breach of the case.

Therefore, as per facts of the case, Mary is liable to civil penalty and consideration put by minor shareholder, Mee-Ling valuation shall be taken into consideration by other respective parties of the company.

As per facts of the problem, the Company Secretary plays a significant role in a company as it bound to carry a liability to take care of every minute of the affairs of the company. In the context of the appropriate response to the problem, Mick had committed a breach of its fundamental duties. He was obliged to take reasonable steps of care and diligence in the consultation process.

Chris, managing director is not bound by the malicious conduct of the Mick. However, Chris is advised to sue Mick for the breach of its fundamental duties.

The case cited in the response to the present problem. In the case, court held that Company Sectary is also liable or obliged to perform its fundamental duties just same as the director of the company. In the case of defaults in breach, the director is entitled to terminate the services of such company sectary and also bring a suit for breach of its fundamental duty.

As per facts of the case, if Tim enters in a contract on behalf of the company then Tim is liable to consider following elements in reference of company’s liability

• Firstly, Tim is liable to avoid any future conflicts of interest against Lisa as contemplated in section 175 of the Act.
• Secondly, Tim shall not accept any benefits from third party that is Home bake Private Limited Company as stated in the Section 176 of the Act.
• Lastly, every director is liable to declare or assert in any proposed transaction of third party which should be run in parallel with the balance of arrangement of an interest of the company.

A Company may enter into any contract or agreement through the medium of its agency of an individual who holds either express or implied authority in the company. Such agency consists of the constitution of directors and company secretary. As per facts of the present problem, Carol, a company secretary of the company is legally entitled to enter into contract with third party as he hold the position as director of the company.

The referred case for the present problem discusses that the company secretary was legally entitled to enter into contract with third party on a subject that such company secretary is indebted on the subjects to observe basic liabilities or fundaments duty towards an interest of the company.

As per facts of the above stated response to the problem, Megan is also entitled to enter into a company as he acquire a same position like other members of the company. No one has an authority to prohibit Megan to contract with third party unless such contract is formed against the best interest of the company.

The case referred in the context of appropriate response to the problem, the court held that any agent of the company can enter into a contract and in case of defaults made by agent then in such circumstance the company is not liable for the acts of its agent. The third party shall not sue company directly. However, third party may bring action against such agent in his individual capacity.

As per facts of the case, the statutory obligations of the R&G Company deal in reference with director’s duty towards the company. These duties are

• Duty to act in bona fide intention and good faith.
• Duty to perform any act with care and diligence.
• Duty to evade inappropriate practice of material.
• Duty to evade inappropriate practice of position in the company.

In this present problem, the company failed to exercise the fundamental essence of above stated obligations and perform the breach of contract.

The case referred in this context of the present problem where federal court held that the statutory duties burdened on the company directors and other officers of the company. The Corporation Act 2001 states that every director is liable to observe the fundamental duties towards the company. In default, every director is liable to stand in a fiduciary capacity and liable to maintain the company interest on the priority.

Therefore, the R& G Company liable to civil as well as criminal penalty as it failed to disclose the appropriate material and also failed to deliver the adequate format of audit report based on genuine transactions of the accounts and audits.

As per facts of the case, the potential civil liability shall be imposed against the R& G Company according to the Australian Tort Law. The liability shall lies on the basis of ground that is “performance of negligence in duty of care”. Under Australian Tort Law, the duty of care considered as a vital element in context to prove legal obligation on an individual. In this present case, the R&G Company perform the negligence in duty of care. Therefore, every director of the company is liable to observe the standard of duty of care according to legal application of the Australian Tort Law and Corporation Act, 2011.

The most popular leading case of presents the view that no one can be exempt by its personal liabilities to observe the standards on duty of care and diligence. The case sets the universal application that every individual must owe duty of care.

In order to prove the following element of negligence raise against the R& G Company as per facts of the case are

• Non-disclosure in audit and defect in product
• Presentation of deceptive audit repost to ASIC
• Breach of fundamental statutory compliance of director’s fundamental duties under corporation act.

Also, the verdict of case held that breach of duty of care in reference of negligence also come under ambit of defaulting  conduct in nature of  presentation of deceptive statements that ultimately results into severe financial loss.

In order to determine a breach of the duty of care, the court needs to follow the principles

1 The “Principle of foreseeability” that is the court must evaluating a risk factor on the basis of losses taken place by the defaulting party.

2 The “Principle of Reasonableness” that is defendant failed to exercise the application of reasonable in duty of care.

Therefore, according to present problem, the court shall consider the above stated factors while deciding the potential civil liability of the R&G Company.

Bibliography

RI Bob, Tricker, and Robert Ian Tricker, Corporate governance: Principles, policies, and practices. (Oxford University Press, USA, 2015) 632

Cases

Arrowhead Capital Finance Ltd (in liquidation) v KPMG LLP [2012] EWCH 1801 (Comm)

Ashbury Railway Carriage and Iron Company Ltd v. Riche (1875) L.R. 7 H.L. 653

Christopher Dixon & EFI Loughton Ltd v Blindley Heath Investments Limited & Others [2015] EWCA Civ 1023

Daniels v Anderson (1995) 37 NSWLR 438

Deputy Commissioner of Taxation v Clark [2003] NSWCA 91

Diggle v The London and Blackwall Railway Co (1850) 3 Ex 442 [155 ER 193]

Donoghue v Stevenson [1932] UKHL 100

Hedley Byrne & Co. Ltd. V. Heller and Partners Ltd. (1964) A.C.465

J Wright Enterprise Pty Ltd v Port Ballidu Pty Ltd [2010] QSC 213

Mobileciti Pty Ltd v Vodafone Pty Ltd [2009] NSWSC 899

Corporations Act 2001 (Cth) Australian Tort Law.