Liabilities of Azure Ltd

The main issue is to tender advice to Raj and Alana with regards to whether the contract enacted between Seedy Vineyards and Organic Wines Pty Ltd (OW) is an enforceable contract or not taking into cognisance the following aspects.

• When agent Priya has entered into legal relationship with Seedy Vineyards irrespective of the fact that she is exceeding the level of authority.
• Breach incurred of the objects clauses of OW’s constitution

Company holds a separate legal title from the owners as highlighted in s. 124(1).  Company has various agents who form legal relationships with the third party in the name of company. These agents receive authority from the company to form legal contractual relations. These agents are not liable for the contractual liabilities which they have formed on behalf of the company with third party. When agents are forming contract in the name of company with the third party while they are not having sufficient authority, then the relevant provisions applicable are highlighted in s. 129, Corporations Act 2001

In accordance with this section, the third party has the legal right to assume that the agent who works for the company holds requisite authority and hence enacts the contract in good faith. The rights of the third party will be safeguarded under indoor management rule as they have entered in good faith and do not have any clue regarding the lack of authority of agents. As a result, the contractual liabilities raise from the enactment of the contract by agent will be enforceable on the company and company has to discharge all the contractual liabilities. Further, Royal British Bank v Turquand[2]  is the evidence of above highlighted understanding[3].

The exception of s. 129 is highlighted in s. 128, where the third party have reasonable suspicion about the lack of authority on the part of agent[4]. It means when the third party has any hint, knowledge or suspicion about the lack of authority of the agent and still has enacted a contract with the agent then, the contract would not be enforceable on company[5].

The relevant provision with respect to the objects clause is s. 125 (2) that indicates that breach of only the object clauses by the agent would not limit the activity of the company thereby not making it illegal. In other words, 125 (2) provides wide scope for the course action of company while making legal relations with third parties even through there is breach of object clauses which is mentioned in company’s constitution[6].

In present case, Priya has been appointed as the managing director of Organic Wines Pty Ltd (OW) and has the authority to work on behalf of OW and to form contracts with third parties. Priya has entered into a contractual relationship with Seedy Vineyards. However, it has been found that she does not hold required authority which is evident from the two factors which are listed below.

• Priya has been appointed as the managing director of Organic Wines Pty Ltd (OW) for a tenure period of 2 years which ended in February 2018 and therefore, it is essential to reappoint her on the position of managing director so that she can again work for OW. However, she has not been reappointed for the position and therefore, as per the constitution of the company she does not have authority to work as managing director of company after February 2018. However, she has enacted a contract with Seedy Vineyards In June 2018 which is invalid.
• It is clearly stated in the constitution of company that she cannot form contracts for any transaction higher than $100,000 but she has formed a contract with Seedy Vineyards for $500,000 which is in violation with the company constitution.

Enforceable Contract under the Corporations Act 2001

Therefore, the conclusion can be drawn that Priya has formed the contract with Seedy Vineyards while holding lack of authority from OW. Further, it is essential to note that Seedy Vineyards does not have any hint or suspicion about the lack of authority of Priya as she was working for OW for more than 2 years and hence, Seedy Vineyards has entered into contract in good faith. Thus, indoor management rule will be enforceable here as per s. 129, Corporation Act 2001[7].

Therefore, the company OW will be held accountable for the contract enacted on the part of Priya. Also, it is apparent that objects clause of constitution of company has specified that only organic grapes should be used for wine. However, Priya has formed contract for purchasing inorganic grapes from Seedy Vineyards which indicates the breach of objects clause. Here, s. 125(2) will be applicable and breach of objects clause will not limit the authority of agent and therefore, the contract will be enforceable on OW irrespective of the breach of object.

Part (b)

The main issue is to find whether the clause in the company constitution regarding Ted appointing himself as solicitor of would be legally enforceable or not. Further, breach of this clause would also be examined and available remedy would be provided.

As per s. 140 Corporation Act 2001, provisions stated in company’s constitution forms an imperative aspect to run the company smoothly[8]. The contractual associations among various members and directors and with the company are defined by the various clauses of the constitution. It is essential that members & relevant agents of the company must conduct as per the clauses of constitution. Further, as per Part 2F, when a member suffers loss of position because of the conduct of the member or when a member fires another member without any reason or reason rather than specified in clause of constitution, then he/she can approach the honourable court and take legal action to get the position back[9].

Ted is a member who has 5% stake in the company. It is noteworthy that Ted has drafted the constitution of OW and also, has inserted a clause about the solicitor that he himself would work as solicitor for OW and would only be fired when he has engaged in some misconduct. It is apparent that Priya wanted to appoint her boyfriend Carl for solicitor position and therefore, fired Ted without any reason. Therefore, the interest of Ted will be safeguarded under s.140, Corporation Act 2001 and thus, the members of OW along with Priya cannot harm the interest of any of the member including Ted by breaching the clause of constitution of company. If Priya does fire Ted from the position, then Ted has right to approach the honourable court and take legal order to get the solicitor position back as per Part 2F (1).

Breaching of Company Constitution Clause and Available Remedy

Question 2

Part (a)

Both common law and statutory duties are applicable on directors of any company as they possess significant power and have rights to take imperative decision for the company[10]. As per s. 181 Corporation Act 2001, the directors must take decision in good faith of company and use their power for the profit of stakeholders and company. Breach of duties of director is explained in s. 181 and the directors may suffer civil penalties as discussed in s. 1317 E Corporations Act 2001[11].

It includes the scenario in which the director may work for own- interest and restrict the registration of transfer of shares of transferee, when the remedy will be available to the transferee as given in s. 10F (1). According to this section, the transferee who could not register transfer of shares may go to court and take legal remedy and order for the respective directors to not restrict the register transfer of shares under s. 1071 F(2)[12].

It can be seen that Miles, Karim are directors and also, shareholder of Seedy Vineyards Pty Ltd with shareholding of 45% each. Further, the remaining 10% of shareholding has been acquired by Olive. Company’s current position was not good enough and hence, company was not paying dividends to their shareholder. As a result of this, Olive wanted to liquidate her shareholding. Karim and Miles (both the directors) wanted to buy the 10% shares of Olive but could not buy as they were not having requisite funds. Meanwhile, Olive agreed to liquidate the shares to Priya.

After the directors got to know that Olive is selling shares to Priya, they then restricted the registration of transfer of shares of Olive so that they could buy the shares later on and get significant gains as they have enacted the contract with OW that might provide significant returns. It is apparent that Miles and Karim have breached directors’ duties by restricting the registration of transfer of shares for Olive under s. 181. Hence, Olive can obtain courts notice under s. 1071 F(1) and get the permission to sell her shares to Priya[13].

Part (b)

The key issue is to determine if the statutory directors’ duties have been breached by Miles getting in to a share purchase with shareholder Olive for 5% stake purchase without disseminating the information in regards to the contract for supply of grapes from OW.

One of the duties bestowed on directors is highlighted in s. 191 Corporation Act 2001 as per which any material conflict of interest need to be disclosed by directors to the board so that the objectivity of the business decision making is not adversely impacted. However, the disclosure does not need to be made to the shareholders regarding conflict of interest[14]. Also, in accordance with s. 183 Corporations Act 2001, it is essential that the information that directors derive owing to their position must not be utilised for deriving personal gains or benefiting any associated entity. Any violation of this duty would bring s.1317E into play and result in civil penalty on the defaulting director(s)[15].

In accordance with the information provided, it is apparent that director Miles has given agreement to purchase 5% stake in the company from shareholder Olive. A key reason which could have prompted the purchase of shares from Olive at this junction was the $ 500,000 contract to be signed with OW owing to the positive impact on valuation of the company. However, disclosure regarding the same was not made to Olive.  Even if there is any material conflict of interest for Miles, it is noteworthy that the decision to buy shares is to be taken by Miles in her personal capacity and not by the company. Thus, s. 191 disclosures to other directors are also not required.

 However, owing to the private information about the contract with OW by buying shares from Olive, Miles is trying to derive significant amount of self-advantage which is not permissible by s. 183. Disclosing the information about the contract with OW would imply that Olive would demand a higher price but it would be a fair price and will not lead to a windfall gain for Miles. The windfall gain is visible since the company after contract signing would pay dividend that is five times higher than in any of the previous three years. Therefore, going ahead with the share purchase by Miles without disclosure of all the relevant details to Olive would violate the directors’ duty levied under s.183.

Hence, it can be concluded that Miles has breached the duty of director as per s. 183 since private information is being used for deriving material gains for self and hence disclosure to Olive should be made before making a share purchase agreement for 5% stake.