Altering Company Constitutions

1 A. In the present case, the issue is if Salman can prevent the directors of Astounding Gifts Pty Ltd from amending the constitution of the company and including a clause in the Constitution provides that the directors can expropriate the shares belonging to Salman. In this case, the two directors of the company, Kody and Ryder are introduced a proposal according to which the Constitution of the company should be amended and the clause should be added. According to this clause, a power has been given to the directors to buy back the shareholding of less than 12%.

The process to amend the Constitution: in order to amend the constitution of a corporation, the powers that have been provided in s136(2) need to be used. According to the requirements that have been described for this purpose, there can be a requirement that additional conditions need to be fulfilled or the consent of some person may be needed or the shareholders are required to pass such a resolution unanimously. Consequently, if any additional requirements have been prescribed by the Constitution of the company, such requirements need to be fulfilled before any amendment made to the Constitution can be considered as effective.

Gambotto v WCP: the verdict of the High Court delivered in this case serves as a significant case. The reason is that this gentleman has imposed significant restrictions on the power that has been provided to the majority to amend the Constitution in order to expropriate the shares of the minority shareholders or valuable rights attached with them. In this case, it was held that any amendment made to the Constitution of the corporation in order to give power to the majority to expropriate the shares of minority can be treated as valid only if such amendment has been made for proper purpose and the amendment is not oppressive for the minority. 

Hence, the process that needs to be used in other to alter or modify the constitution requires the passing of a resolution by a majority of 75% votes. In the present case, it is available to Kody and Ryder to amend the Constitution of Astounding Gifts but they can be prevented by Salman if it can be established that the clause that is going to be added to the Constitution of the company is not fair and if it is oppressive for the minority.

B. In this part of the question, it has to be seen if Melanie can enforce a contract that was created between Ryder and Melanie.

Non-Payment of Contracts

Pre-registration contract: In this case, preregistration contract has been created between Ryder and Melanie. At that time, the promoters of the company, Ryder and Kody wanted to register their company in the name of Incredible Gifts Pty Ltd. . But this name has already been taken by another company. The result was that they had to register their company in the name of Astounding Gift Pty Ltd. On the other end, Ryder had entered into the contract with Melanie on behalf of Incredible Gifts. This contract provided that the company was going to be a monthly fee of $5000 to Melanie in return of her services.

The provisions that deal with pre-registration contracts are present in Part 2B, Corporations Act, 2001. In this regard, according to s133, the provisions of Part 2B.3 replace any rights and liabilities that can be used by a party concerning pre-registration contracts. The result is that the aria statutory provisions as well as the common law provisions are not applicable in order to establish rights and obligations that are based on pre-registration contracts. In this context, the Corporations Act provides that a company will be bound by the contract and may claim the benefit that has been provided by the contract if the company is reasonably identifiable with the contract. At the same time, it is also required that the contract should be ratified by the company within the time agreed or if no such time has been agreed between the parties, within reasonable time of the conclusion of the contract among the parties. But in case the company has not been registered or if after its registration, the company does not ratified the contract or enters a substitute, the promoter who entered the contract on behalf of the unregistered corporation will be held liable for the damages to the third-party.

The term promoter is not described by the Corporations Act. However, it is generally believed that the promoter can be described as the person who is involved in the incorporation or the floating of the company, directly or indirectly. However it needs to be noted that the persons were acting in purely professional or ministerial for this purpose are not considered as promoters. According to the law, a promoter has a fiduciary relationship with the company formed by him or her. During this season, the law requires that the promoters would act in the best interests of the company. At the same time be promoters should not put themselves in a place where there is a real possibility of the emergence of a conflict between their duties as the promoter and their personal interests. Under these circumstances it is the duty of the promoters to disclose the presence of a personal interest in a transaction that is related with the company. It is also necessary that the disclosure made by the promoters should be full and frank. Generally, such disclosure is required to be made to an independent board of directors. On the other hand, when the director has failed to make such adequate disclosure, it is available to the company to rescind the contract with the promoter or to sue the promoter for recovering any undisclosed profit. Apart from the common law, the Corporations Act and the ASX listing rules also provide rules for the promoters of public companies. For example, it is required by the statutory regime that certain disclosure should be made by the promoters regarding the interests of issuing to the promoters of the company. Moreover, the ASX listing rules also denied the transfer of shares issued to promoters, for a specified time.

Breach of Directors’ Duties

As a result of section 131(1), the law related with pre-registration contracts will not apply in case the company in question has been incorporated before the formation of the contract. The court had decided this matter in Commonwealth Bank of Australia v Australian Solar Information Pty Ltd (1986) 11 ACLR 380. There the Court stated that the law related with pre-registration contracts did not apply where the shelf company has been used for the formation of a contract before the shelf company was renameda so that it may suit the business purpose.

In this case, the contract was created by Ryder on behalf of Incredible Gifts Pty Ltd., that was yet to be registered. However, later on, the promoters had to register the company as Astounding Gifts Pty Ltd. Due to the reason that the company can be reasonably identified with the contract and at the same time the company has also ratified the contract, it is available to Melanie to bring action for enforcing the contract against the company and claim her balance amount.

2 A. The issue arises if the liquidator of Chip-Eze Pty Ltd can bring action is the directors of the company for violating their duty prescribed by s181, as well as other equivalent duties.

The law prescribes several duties for the directors. These duties are being prescribed by statutory law (Corporations Act, 2001), common law and may also be prescribed by the company’s Constitution. In view of the significant power that has been provided to the directors for managing the affairs of the company, certain issues may arise. Therefore, it is possible that the directors may misuse the position for a personal benefit. In the same way, the shareholders of the company can be vulnerable, particularly the shareholders was the passive investors. Due to the circumstances, it becomes important that duties of the directors should be mentioned clearly. It also needs to be noted that different remedies are available in case of different duties. The law provides that the relationship present between directors and the company is fiduciary in nature. This standard of loyalty can be seen in case of many positive duties of the directors as well as certain negative ones. The result is that the law requires that in all the cases, the directors should act in good faith. The directors should always give preference to the interests of the company. The law also requires that the actions of the director should be for proper purpose. Their discretion should remain unfettered, and every matter brought over them should be considered by them properly. These duties have been mentioned by the common law, and they have also been reinforced by section 181 of the Act.

Directors’ Selling Shares Before Liquidation

Breach of duty: in order to decide if in a particular case, it can be stated that the director has breached his or her duty, generally the courts are not in favor of substituting their own judgment instead of the business decision made by the director. At the same time, the business judgment rule that has also been added in the Corporations Act is also applicable where it has been alleged that the director has breached study of care and diligence. However, this defense is available only for the delegation of the breach of section 180. The result is that when it has been alleged that any other duty like the one mentioned in section 181 has been breached, this defense is not available. Hence the purpose behind imposing state duties on the directors is to ensure that the shareholders are protected by the directors from the risks that are inherently present when a person has been handed over the property or the management of the affairs of some other. However, if the decisions are taken in good faith and in the directors act honestly, the directors are adequately protected. On the other hand, if the director fails to act in good faith, such a director will be responsible for the breach of duty that is present in section 181.

In view of the circumstances mentioned above, in this case also the directors of Chip-Eze Pty Ltd can be held responsible for the breach of the duty prescribed by section 181 and other equivalent duties.

B. After going through the facts that have been provided in this scenario, it has to be seen if Faizah can take any action against Jordan for the breach of his director’s duties. In this case, Faizah had expressed a willingness to purchase the shares in Chip-Eze. Jordan made an offer to sell 5% of its shares to Faizah. However, very soon after the purchase of the shares, the company went into liquidation.

In this regard, and has been provided by law and also in view of the duties that are being imposed on the directors, it is required that the director should not use their powers for an improper purpose. The presence of this duty requires that the director should not use the powers given to them by the company for any inappropriate purpose. On the other hand, it can be described that the powers have been used improperly, if it is found that the director and use their powers for making a personal achievement or for the purpose of defeating the voting power of the present shareholders of the company. As compared to the situation, the raising of capital for the company or taking the benefit of a commercially beneficial opportunity that has been provided to the company can be described as a proper purpose. However in this context, it is worth mentioning that in view of the provisions stated in section 182, it is necessary that the director should not use their position improperly. Hence it is important that the directors should refrain from improper use of their position which may take place in the cases where the directors were looking for some personal benefit. 

At the same time it has also been provided by s588G that the director should not allow the company to trade if they have. Reasonable doubts regarding the solvency of the company. It is known as the duty of the directors to prevent insolvent trading.

In this case, Faizah had expressed a willingness to Jordan to purchase shares in the company. Jordan agreed that he will sell additional 5% of the shares to Faizah. This transaction was completed between Jordan and Faizah on 8th August. However, as the directors of the company had not been paid, they need an application in the court and an order was issued by the court. A liquidator should be appointed and the company should be wound up. Under these circumstances, Archibald has been appointed as a liquidator of the company. Therefore in this case, Faizah can take action against Jordan for the breach of duties. These duties include the duty that has been mentioned in section 181. This is a duty of good faith.

At the same time, the study also reinforces the equivalent duties that having prescribed by the common law. Under the circumstances, it becomes a possibility of the directors to give preference to the interests of the company. At the same time, the powers given to the directors should not be used by them for making a personal benefit. On the other hand, in this case, Jordan clearly breached its duty. He sold 5% of its shares to Faizah even when he was aware of the financial problems being faced by the company and the probable insolvency of the company.

Under the circumstances, it can be concluded that in this case Faizah can take action against Jordan on account of breach of duties by Jordan.

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