Legal Advice On Contract Breach, Directors’ Duties, And Shareholder Rights In A Case Study

Alternative for Non-payment under Contract

1 A. The directors of the company decided to change the company constitution in this case to buy back shareholdings that are less than the amount of 12 per cent and as Salman had 10 per cent shareholding her status of shareholder was being purchased back by the organisation. In this section the method of changing of constitution in a company under the Company Act 2001 is going to be discussed. The exploration of this section is going to serve as a basis of advice for Salman regarding her possible efforts that can help in the prevention of the change in the constitution. It is notable to mention that the directors of the company Astounding gifts Pty ltd decided that Salman who is an employee of the organisation was going to be provided with 10 per cent of shareholding within the organisation. The conflict arose when the directors gathered information regarding the fact that Salman also took job position as an accounted in a rival organisation that is Gifts Pty Ltd. Moreover there was also information regarding the fact that she was trying to act against the interest of the company by trying to persuade the chief supplier of the organisation Malanie. Malenie was a local handmade craft gift designer who was the chief supplier of the organisation.

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There is a certain process for changing the constitution within an organisation as par the Corporation act 2001. The constitution of a company is served as the primary contract between all the individuals working within the organisation. However there are choices of either having a constitution or a replaceable rule. But as par the case study there is clear evidence that the organisation has formed its constitution.  After the formation of a constitution any change in the constitution can be made after a notice of 21 days as it is a Pty Ltd company. At least 75 per cent of the votes have to be in favour of making the change.

Salman is a 10 per cent shareholder of the organisation and as mentioned before after the formation of a constitution to make any alteration in it there has to be a 21 days’ notice that has to be provided to each of the stakeholders of the organisation . So intimation has to be given to Salman before any change was to be made but the change in the constitution was done by the directors immediately without giving any information to Salman. Salman also has a voting right in the proposed alteration however this is not going to be effective in this case because 75 per cent of votes are only required for the implementation of any change and as both the directors Kody and Ryder holds 45 per cent of the share each they are likely to be able to successfully pass their resolution.

Directors’ Breach of Duties and Relevant Penalties

B. Melanie is the chief supplier of the organisation. A contract was formed between Melanie and Ryder for supplying of her gifts and handmade crafts for a period of 12 months in exchange of a monthly payment of $ 5000. This contract was signed on 26th of April 2018. The contract was formed between Ryder, the director of the company and 45 per cent shareholder of the organisation and Melanie. From the 12th of May 2018 they started their monthly payment. On 12th of July they were informed regarding the breach of contract on the part of Melanie. They were as informed that Melanie on provocation of Salman was also supplying product to a rival company even though she was in an exclusive contract agreement with the organisation. They decided to stop further payment from 12th July onwards for the rest of her time.

As the nature of the contract of Melanie with Ryder director of Astounding Gifts Pty Ltd was exclusive contract hence supplying of product to any other organisation is clearly going to be considered as a breach of contract. But in this case there is no evidence that Melanie has started to supply her products to the competing organisation. The report in this regard was that Salman was ‘trying to encourage Melanie’ for the change in the supply of the products to its rival organisation. However there is no report of the event that Melanie has broken the contract and started supplying to its rival organisation . Hence in this situation the decision regarding the stopping of payment is going to be considered as a violation of contract on the part of the organisation that is Astounding Gifts Pty Ltd. The breach of contract terms occurs when one party stops conducting their part of the duty even when the other party has not ceased to perform their side of the duty. The legal remedy for direct breach of contract can be availed by Melanie in this case against the Astounding Gifts Pty Ltd . The stopping of further payment by the organisation has been done on the basis of an assumption and without concrete evidence and has been done without making any prior communication with the other party involved in the contract. Even if the accusation has to be taken into consideration it is of importance on the part of the organisation to make an oral or written contract with the supplier or at least they should have provided with a letter of communication citing the reason for the stopping of further payment. This can also be cited against the organisation. So considering this situation the key advice for Melanie in this situation is that she should make a communication on her part with Ryder who is the director and majority shareholder of the company regarding her entire perspective regarding the situation as the contract was formed between Melanie and Ryder. In case Ryder refuses to make a compensation for the breach of contract and establish their original contract term than Melanie can take legal action against Ryder for an actual breach of contract. This may result in the reestablishment of the contract and/or payment of the tenure in terms of civic penalties on Ryder.

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Shareholder Rights in Buying Shares

2 A. Corporation act 2001, section 181 discusses the duties and responsibilities of the directors of a business organisation. The statute and general rule decides on the duty of the organisation. The genesis of the duty decides on the different remedies. The company and directors relationship is considered as a fiduciary relationship and thus there are high standards of loyalty that is expected from the organisation. the chief duties under the loyalty of the organisation involves working for the best interest of the organisation, giving proper importance regarding taking decisions on behalf of the organisation, to serve to fulfil the corporate purposes of the organisation etc. the section 181 of the Corporation Act 2001 reinforces these duties of the organisation.

In this situation the Chip-Eze Pty Ltd which has two segments of business that is production of potato crisps and frozen snack food business. The potato crisp manufacturing side of the business has been suffering from financial losses because of their outstanding to the suppliers . The director of the organisation prior to the liquidation of the company separated the two businesses in forming two different organisations. This was done by the director of the organisation for the purpose of saving the profitable business from being impacted by the non profitable side of the business.

The decision of the director Micheala of the organisation in this scenario can be considered to be in the best interest of the business. However there is a grey area in this situation. Director Micheala of the Chip-Eze company took the decision of formation of a new company in order to save the business can be considered as a right decision but cannot be considered as a right decision for the organisation that is Chip-Eze Pty Ltd. Again considering the fact that the organisation was going through a financial crisis which may have resulted in the liquidation of the organisation in such situation the frozen food business would also had been sold for the repayment of the debts of the suppliers of the potato manufacturing section. This would result in more harm of the business. So the formation of the Freeze Me Pty Ltd for the purpose of the ultimate gain of the business can be observed in the activity of the director Micheala . Apart from that the director of the organisation has also ensured that the customers and the supplires of the organisation has also been informed regarding the possible changes. Thus business apart from the name of the organisation has been protected.

Director Jordon who held 25 per cent of shares of the organisation 2 days before the formation of a different company sold 5 per cent of shares that was held by him to one of the outside investors Faizah. Later on the business ended up in insolvency. So the act of the director who was aware of the insolvent condition of Chip-Eze Pty Ltd as Micheala had the discussion regarding the formation of a new company on 1st August in that year. But Jordan sold 5 per cent of his share to the outside investor Faizah on 8th August of the same month. The director of the organisation according to the civil obligation should make adequate consideration before a making a decision. The director of the organisation is also responsible to the shareholders of the organisation. The director is responsible for the money of the shareholder and the director should not treat with bias to any particular shareholder. in this case Jordon was director and shareholder of the company and thus the information that was available to him was misused by him for the purpose of selling some of his shares to an outside shareholder. This action is done for the purpose of personally gaining as a shareholder. The general legislation and torts can likely be used in this situation. Jordon also kept this transaction as a secret from the rest of the directors of the organisation. Hence this act can be considered to be a violation of the duties of the director. The shareholder in this case can ask for a windfall remedy in which the benefits that is gained by the director because of the breach of duty can be claimed by the shareholder. The section 181 (b) which states that the director should exercise his or her power for a proper purpose has been stated. This section has been violated by the director in this case. The punishment for the violation of this section can result in formation of criminal charges against the person and can be made liable for civic penalties amounting up to $ 220,000 and imprisonment of sentences up to 5 years.

B. Faizah who is an external shareholder of the organisation showed interest in buying shares of the company Chip-Eze Pty Ltd to one of its directors that is Jordon. Jordon who is director as well as 25 per cent shareholder of the company agreed to sell 5 per cent of shares from his part to Faizah. The exchange to shares took place two days after which the profitable part of the company that is the frozen snack part was separated in forming a different company called the Freeze me Pty Ltd of which Jordon was a part. This decision was taken by the organisation citing the financial issues that were faced by the Chip-Eze Pty Ltd. The inevitability of the dissolving of the company occurred sometime after the separation of the company profitable part of the company . The creditors of the Chip-Eze Pty Ltd applied for the repayment of the debts and as a result the company was liquidated. In this case Jordon didn’tinform the shareholder Faizah regarding the financial issues that are faced by the company.

Section 182 (a) of the Corporation Act 2001 states that a director should not make use of the position that is held by him or her for taking advantage for themselves or someone of their acquaintance.  But in this situation as the director is himself the shareholder as well had the advantage over the external investor. Jordon was aware of the decision regarding the poor financial performance of Chip-Eze Pty Ltd and the decision that was taken inclusively by all the directors for separating the profitable frozen snack section of the company under a new organisation that is Freeze Me Pty Ltd. This information was withheld by Jordon from Faizah. The question regarding the breach of section 182 (a) occurs because of the fact that the 5 per cent share that Faizah wanted to buy was supplied by Jordon from the 25 per cent of the shares that was personally owned by him . This decision has caused personal benefit of the director because Chip-Eze was a loss making company and was about to be liquidated and thus by selling off his shares Jordon was able to reduce the amount of loss that he was about make because of holding of the shares. The withholding of the information was not the breach of this section but selling of his particular shares instead of making the rest of the directors aware of the demand that was made by Faizah is where the withholding of the information was done by the director for the purpose of making personal gain . Thus it can be said that Faizah can take action against Jordon under section 182 (a) of Corporation act 2001 for breach of directors duties for selling her shares in Chip-Eze Pty Ltd before the company went to liquidation.


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