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Corporations Law, Semester 1 2002, questions 1 and 3, score 87
Question 1
Legal position concerning machinery contract
Sparky Pty Ltd has power to enter into contract to purchase machinery by virtue of s 124
of the Corp Act. Section 126(1) recognises that company can enter into contract by agent
with express or implied actual authority. In this case there was no such actual authority
because:
(1) While s 198A confers general authority on directors to ‘manage business’,
unlikely that this implies authority on single director to bind company per se
(Heycraft).
(2) In this case, constitution prevents single director from binding company for
machinery purchase.
Point (2) is subject to the constitution being validly adopted in accordance with s
136(1)(a). Requires all members to agree in writing. No evidence that B so agreed.
However point (1) still prevents C from having sufficient actual authority.
Question is whether C had apparent authority to bind company. May rely on
presumptions in s 129 of Corp Act, which prevent Sparky from asserting otherwise. If the
machinery supplier attempts to rely on s 129(3) (person ‘held out’ as director has
customary powers, is duly appointed) will have difficulty because no evidence that
company made representation to supplier as to status of C.
Better course would be to rely on assumption in s 129(2), that director named in ASIC
records (as C is) is validly appointed, has customary powers. Could then rely on
assumption in s 129(1) (assumptions are cumulative – s 129(7)) that constitution validly
complied with. Problems in Northside do not arise (have already shown apparent
authority).
Further problem for machinery supplier is s 198B, which supplies as part of company’s
constitution per s 135(2). Requires that 2 directors sign negotiable instrument. Once
again, supplier should rely on s 129(2) to establish that C had customary authority of
director and s 129(1) (constitution validly complied with).
Further issue is that C has committed fraud (forging signature). In Northside, HC mooted
that fraudulent entering into contract could not attract the indoor management rule (s
129(1)). Corp Act states that third party entitled to s 129 assumptions notwithstanding
fraud (s 128(3)).
Conclusion
Likely that X able to press for payment. Contract binding.
Part (II)
There is no question that A lacked actual or apparent authority to enter into lease
(company not yet formed). However may be argued that contract binding because ratified
by company at first directors’ meetings. However since the lease is a pre-registration
contract, principal (company) could not have ratified at time contract made. Common law
doctrine of ratification no use.
However s 13 of Corps Act provides that company may take on liability for preregistration contract in some circumstances. In this case, A clearly entered contract as
agent for company (‘on behalf of’ and sought not to have lease commence until
registration). Section 131(1) applies.
The company was since registered by under a different name (not ‘Zap’ but ‘Sparky’).
Section 131(1) still applies because company ‘reasonably identifiable’ with that which A
purported to act on behalf of.
Finally, for company to take on primary liability, ratification must occur within a
reasonable time. In this case 3 wks, 3 wks after company formed. We can assume this
time was reasonable because
(1) Lessor knew that lease would not commence until company registered – expected
delay;
(2) Land contracts – time not particularly of the essence.
M should be advised that company bears primary liability for contract. If it fails to meet
obligations, court may order A to pay damages for which company is liable, but such an
order unlikely in this case (not a sham incorporation).
Part (III)
Validity of resolution
The proposed alteration involves ‘a conflict of interests and advantages’ (Gambotto).
This is because ABC will continue to derive income from corporation, while M will get
no return.
Such an alteration will be valid unless not within purpose contemplated by constitution or
oppressive (majority in Gambotto). This should be understood as ‘broad negative test’ of
type proposed by Dixon J in Peters.
Even so, very likely hat court would find alteration oppressive. The term is to be
understood as bearing ordinary meaning in corporate law. In Scottish Co-op, it was
defined as burdensome, harsh, or wrongful. Clearly, by depriving m of all returns it
satisfies this description.
It is no doubt significant that if ABC simply refused to declare dividents (rather than
altered constitution to achieve same end) their conduct would likely come under the
oppression remedy. Though in general, failure to pay dividends not oppressive (Robert
Walter) it seems court will find it so if directors increase wages (as in Shamsallah) or
cannot produce ‘good business reason’ for refusing dividend (Morgan v 45 Fleurs). In
this case, no reason, ABC to continue to receive ‘fees for work’.
Likely that proposed alteration invalid because ‘oppressive’. Does not satisfy Gambotto.
Appropriate remedies.
As a minority shareholder, the best remedy M could seek would be order under s 233 on
grounds that proposed alteration ‘oppressive, unfairly discriminatory or unfairly
prejudicial’ (s 232(e)). As noted above, likely that amendment falls into this category.
Would be best to request injunction under s 232(1)(a), or if members go ahead with
alteration, have constitution returned to original state under s 233(1)(b)).
Injunction under s 1324 for breach of statutory duties (clearly directors are acting
sectionally – Mills v Mills) or equitable injunction for same not appropriate compared to
oppression.
Alteration does not affect ‘class rights’ (no categories of shares) therefore no relief under
s 246D.
Finally, M may argue that has right in own name because amendment infringes ‘personal
right’ to dividends and therefore not subject to Foss. Difficulty is that dividend rights not
normally considered personal (unless declared (right to payment)).
Question 3
As a minority member Brunhilde should be advised to seek order under s 233 on grounds
that brothers’ conduct ‘oppressive or unfairly prejudicial or discriminatory’. The
following acts might constitute oppression:
(1) Not paying dividends. While this is not in itself oppressive (Roberts v Walter),
may be in some circumstances (see Shamsallah). In this case argue that
oppressive b/c Brunhilde has only minimal income in company wages (her son)
unlike other parties, who have director’s salary.
(2) Not allowing nomination from floor, not allowing questions about rent. Section
2505 of the Corp Act states that chair must allow members as a whole to ask
questions. Unfortunately Brunhilde not entitled to ask for resolution (to nominate
director) because has less than 5% of votes (no votes while Fritz alive): s 249N.
(3) Organising meeting during school holiday. ‘Strategic conduct’ may be oppressive
(see John Starr on ‘commercial tactics’ at GM).
(4) ‘Locked in’ to company. This is not by itself constitutive of oppression
(McWhirter).
(5) Refusing to supply documents establishing rent. While generally, failure to
provide information (especially if member can’t have it by right) not enough for
oppression, in these circumstances Brunhilde cannot be characterised as a
competitor. Good reason for refusing information (principle of non-interference –
Automatic Self Cleansing Principle).
However in deciding whether conduct oppressive, must consider ‘totality of allegations’
(Fexuto). All the circumstance to be taken into account (Shamsallah). In this case,
Grimwald founded on understanding that each brother would receive salary, support
dependents, and that some control of company would go to those dependants when he
ceased to provide. In this case, court may decide to make order under s 233 substituting
for brothers’ oversight (possibility of being missing not dead).
Wide variety of orders available, reluctant to alter constitution (Hannes). Best remedy in
this case would be to have brothers compulsorily acquire shares from Brunhilde for
consideration that reflects their potential voting power (not ‘actual’). Courts willing to
make order of this kind (see Bargot Wells).
Winding up
Brunhilde could seek winding up order under s 461 on basis that company not being run
according to ‘understanding of corporators’: Mackey under s 461(1)(k).
Understanding that all shareholders effectively derive income through wages.
Corporations clearly formed on basis of personal relationships, understanding. Moreover,
no option to exit by selling shares: Ebrahimi. However courts reluctant to wind up
successful company: Koklovich. Oppression, with more flexible orders, would be better
option.