How To Use The IRAC Method

Identify and state the legal issues involved

Managing Director of the organization controls all the affairs of day to day occurring within the company. However, the managing director cannot be selected for more than 5 years. On the other hand, the chairman is considered as a person who is the head of the Board of Directors. The managing director has to provide details to the Board of Directors of the organization (Heibutzki, 2018). The chair person is considered as an independent director and the Non Executive Director, on the other hand, the Executive as well as Non Independent Director(Ajgaonkar, 2015). The Chair person can be the managing director and then designated as Chairman and Managing Director (CMD).

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The nominee director is familiar under a responsibility whether formal or informal in order to act in accordance with the directions or instructions of others. The nominee directors as well as the particulars of nominator should be evidenced in the register of nominee directors of the company. On the other hand, an alternate director is considered as a director who is appointed to attend the meetings of board members on behalf of other directors of company in case, when the other director is not capable to be present at the meeting of the board members. The alternate director cannot itself be considered as a nominee director (Accounting and Corporate Regulatory Authority, 2018).

2. Issues: Whether the company can sell its manufacturing facility? Can the members pass a resolution to remove the director? Can they vote to replace the managing director?

Rule: According to ASIC, directors are required to act for the profit of the company and must act in interests of all the members in a collective manner. As per the rule, the directors cannot ignore the decisions taken by the members in meeting as they are held responsible for taking decisions related to the organization by passing resolutions. The members can pass a resolution for the removal of director under section 203 D of Corporations Act 2001.

Application: As there are 3 directors of the company, and the resolution was passed by 80% votes by the members, so the company cannot sell its manufacturing resource. The directors cannot ignore the decisions of the members as well as the resolution taken by them (ASIC, 2018).The members of the company can pass a resolution for the removal of director and vote to replace the managing director as well.

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Conclusion: The directors cannot sell the manufacturing resource without the permission of the members. The board members possess the right to pass a resolution to remove the director and they can replace the managing director as well by voting.

Explain the legal principles relevant to the issues

3. It is the duty of the directors to put the interests of the shareholders ahead of any other party. Director should not get involved in such a situation where there is disagreement between their individual interest and company interest (Legal Vision, 2015). The best way is to reduce the potential for breach or liability as a director when the interests of the company, shareholders and creditors are prioritized over the third parties.As directors have various duties and obligations,they should consider the interests of the company, creditors as well as shareholders on top priority with the company. So, I agree with this point of view that directors owe duty towards shareholders ahead of other parties.

4. Issue: Whether the court would find the share issue invalid?

Rule: According to ASIC, the major duties of directors are to act in a manner so as to provide profit the company; exercise powers for which they are given authority; to act in a responsible and diligent manner; to avoid conflict of interests; and not to make improper use of their position for their benefits (Baker McKenzie, 2017).

Application: It is the duty of the directors to act for the advantage of the company but at the same time they owe duty towards shareholders as well. The directors should take the consent of the shareholder when he holds 26% of the issued shares that has now been diluted to 20%. As the directors have issued the shares to rise the funding for new factory, so they had no intention to dilute his shareholdings.

Conclusion: The directors are performing their duties and court cannot consider issued shares as invalid because the directors have acted for the best interests of the company. The directors will be able to provide evidences that they have issued the shares to increase funds for opening factory because of declining sales and productivity of the company.

5. Issue: Is Benita entitled to retain the profits made by her? Can Bananas Pty Ltd take legal action against Ted Big?

Rule: It is the duty of the director to keep away from conflict of interests such as giving financial benefits to others in any manner not even indirectly, informally or involving in discussions about financial advantage. The directors must not provide, buy, lease or supply or issue any asset to a related party in any time in future. They must act for the advantage of the company and must prioritize the company, its shareholders and the creditors before third parties (Federal Register of Legislation, 2018). The directors must exercise their powers and discharge duties with reasonable care and diligence and similarly, any special responsibilities taken by chair person might also affect the scope of their duty of care and diligence.

Use the law to argue for each party’s position

Application: Benita is the non-executive Chairperson and is involved in selling products to Bananas for manufacturing of pyjamas. As per the ASIC, the Chairperson or directors of the company must avoid conflicts of interests so, she should not be entitled to get benefitted by doing business with the company in which she is chairperson.

Ted is the marketing director of the company and he should not provide any kind of benefits to other competitors and should act for the benefit of the company. He is not linked with TJ Pty Ltd. as Jemima is the sole director as well as shareholder of the company and is involved in manufacturing and selling dressing gowns. The product is entirely different from what Bananas were selling previously. However, the customers of Bananas have taken over by TJ through signed agreement. So, Bananas can succeed in taking legal action against Ted on this basis.

Conclusion: Benita is not entitled to retain profits made by her. Bananas can succeed in taking legal action against Ted.

6. Issue: Can directors or the company appoint Fred and Trevor to the positions of managers? Can directors issue the shares to Eddie?

Rule: Section 191 of the Corporations Act 2001 requires the director to disclose about material personal interests to other directors(AustLII, 2018). The director should provide details about the nature and extent of interest and association of interest with the affairs of the company. Along with it, ASIC requires the directors to act for the welfare of the company even if it could not benefit themselves (AustLII, 2006).

The Ltd refers to public company and Pty Ltd refers to proprietary limited company so, in proprietary limited company, the constitution provides for the duties and liabilities of directors according to Corporations Act 2001.

c) Section 208 of Corporations Act allows for need of approval from the members for providing financial benefit to related party.

Application:As Fred and Trevor are relatives of directors of the company, the directors can appoint them as managers only after informing the details to the other directors of the company. However, they should be considered as one of the applicants for job and should not be given undue advantage because of being related to directors and if they prove to be capable to hold the position of manager, they should be appointed.

If Adventure Ltd was Adventure Pty Ltd, the constitutionof the company would provide for the duties and liabilities of directorsand they would have acted accordingly.

Consider the law from each party’s point of view

The directors should issue the shares with related party with the mutual consent of the shareholder Eddie as he was holding 52% of shares in the company which reduced to 47%. In order to determine if the breach have been conducted by the directors or not, the court will consider the test of best interests for the company. If the court will find that the act of directors is for benefit of the company and not for third party, it will not be considered as breach.

7. Issue: Whether the directors performed with care and diligence and to prevent insolvent trading?

Rule: Under section 180 of the Corporations Act 2001, the director should perform their duties with care and diligence and their actions should not make the company insolvent (ASIC, 2018).

Application: Henry, Jack and Tanya were the directors of the company. When Jack took the responsibility and not presented any financial report of the trading in six months, Henry and Tanya did not act with duty of care and diligence and not taken hold of the situation. On the other hand due to the act of Jack, the company involved in insolvent trading. So, all three of them are responsible for the financial loss of company.

Conclusion: All three directors did not act in care and diligence towards company and their acts put the company in insolvent trading.

8. As the shareholding of 1000 shares have been evident in the share register under the name of Mary, Cyril should have inspected it before purchasing shares from her. Cyril should have to incur financial loss as she believed Mary unknowingly.

9. a) The share certificate is a legal certificateissued to the shareholder to validate the ownership of specific number of shares within a limited company from a specific date. The limited companies issue the share certificates to their shareholders when they buy shares after the formation of the company(Investopedia, 2018). On the other hand, the purpose behind entry in share register is for transparency regarding control on company, to ensure equal treatment of shareholders. Moreover, the company also has legal interest in being aware of knowing the identities of the beneficiaries of shares registered with voting rights(Lindt & Sprungli, 2018).

The company is required to issue a share certificate in2 months of issuing or transferringtheshares and might issue only one share certificate for all the issued or transferred shares at a given point of time but if shareholder demands separate certificates, then company should issue separate share certificates.

Arrive at a conclusion based on your analysis

b) The transfer of shares refers to the transfer of title to the shares in a voluntary manner by one party to the other. On the other hand, transmission of shares means transferring title to shares through legal operations. The liabilities of transferor ceases once the transfer is complete (The KCP Limited, 2017).   

10. Issue: Are the directors allowed to repudiate to hold general meeting?

Rule:  It is the duty of the directors as well as essential for them to hold general meetings. The directors of a public company cannot refuse to hold general meeting under section 248 of the CAct 2001. In case of refusal by director, members can call general meeting under section 249 F of the Act.

Application: The members can request for general meeting to directors but when the directors refused to call for general meeting, they have conducted breach of their duty. However, the members can call for meeting to amend the clause.

Conclusion: The directors are not allowed to repudiate to hold the general meeting. Even if they refuse, members can call general meeting to make the resolution.

11. Issue: Is the resolution valid that passed at the general meeting?

Rule: The directors are required to inform about their personal interests to the other directors. They should avoid conflict of interests and should act for the benefits of the company (AustLII, 2018).

Application: Being the directors of the company, they have become the directors of competing company which itself is conflict of interests and is disadvantageous for the company. Any kind of resolution passed against the welfare of the company is invalid.

Conclusion: The resolution is invalid as it is against the welfare of the company.

References

Accounting and Corporate Regulatory Authority. (2018). Is an alternate director considered a nominee director? Retrieved from acra.gov.sg:https://va.ecitizen.gov.sg/CFP/CustomerPages/ACRA_google/displayresult.aspx?MesId=15057972&Source=Google&url=va.ecitizen.gov.sg

Ajgaonkar, P. (2015). What is the difference between a CEO, CMD, MD and COO and what are their functions? Retrieved from Linkedin.com: https://www.linkedin.com/pulse/what-difference-between-ceo-cmd-md-coo-functions-pranav-ajgaonkar

ASIC. (2018). ASIC guide for small business directors. Retrieved from asic.gov.au: https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/

ASIC. (2018). Directors’ key responsibilities. Retrieved from Asic.gov.au: https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-key-responsibilities/

AustLII. (2006). Corporate power, related party and shareholder ratification issues in financial transactions. Retrieved from Austlii.edu.au: https://classic.austlii.edu.au/au/journals/QldJSchol/2006/64.pdf

AustLII. (2018). Corporations Act 2001. Retrieved from Austlii.edu.au: https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/

AustLII. (2018). Corporations Act 2001 – SECT 191. Retrieved from Austlii.edu.au: https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s191.html

Baker McKenzie. (2017). Duties and liabilities of directors of Australian companies. Retrieved from Bakermckenzie.com: https://www.bakermckenzie.com/en/insight/publications/2017/12/duties-and-liabilities-of-directors

Federal Register of Legislation. (2018). Corporations Act 2001. Retrieved from legislation.gov.au: https://www.legislation.gov.au/Details/C2017C00328

Heibutzki, R. (2018). The Difference Between CEO, President & Managing Director. Retrieved from chron.com: https://smallbusiness.chron.com/difference-between-ceo-president-managing-director-37047.html

Investopedia. (2018). Share Certificate. Retrieved from Investopedia.com: https://www.investopedia.com/terms/s/share-certificate.asp

Legal Vision. (2015). What are director’s duties and how can a director comply with them? Retrieved from Legalvision.com.au: https://legalvision.com.au/directors-duties-can-director-comply/

Lindt & Sprungli. (2018). Registered share and shareholder registry regulations. Retrieved from Lindt-spruengli.com: https://www.lindt-spruengli.com/fileadmin/user_upload/corporate/user_upload/Investors/BOR/Sharehoder_Registry_Regulations_and_applications_EN.pdf

The KCP Limited. (2017). Procedure for Transfer & Transmission of Securities. Retrieved from Kcp.co.in: https://www.kcp.co.in/downloads/investor/shareholders-information/procedure-for-transfer-transmission-of-securities.pdf