Issue: the issue about company’s constitution and whether the loan contract between ABC bank and Sambal Pty Ltd is invalid.
State the law:
Section 140 of the corporations act states that:
“A company’s constitution (if any) and any replaceable rules that apple to the company have effect as a contract: (a) Between the company and each member; and (b) Between the company and each director and company secretary; and (c) Between a member and each other member;
Apply the law:
According to section 140, a company’s constitution is only an internal governance rule, it cannot be enforced by outsider and also cannot be used and act between a company member and an outsider (Corporation Act, 2001).
In this case, Sambal Pty Ltd has a constitution, which restricts the amount of money the company can borrow at any one time to $10m. So, as a director of Sambal Pty Ltd, both Jim and Peter require compliance with this internal governance rules (maximum borrow $10m at one time), however, the directors who had been authorised by the board had borrowed an extra $2m loan from ABC Bank this time.
Well, at the same time, section 140 is important in determine that the consequences of a failure, by some person who is bound by them, to comply with the internal governance rules. This means the liability should be undertook by the directors.
State the law:
Section 125(1): if a company has a constitution, it may contain an express restriction on, or a prohibition of, the company’s exercise of any of its powers. The exercise of any of its powers, the exercise of a power by the company is not invalid. 125 (2): if a company has a constitution, it may set out the company’s object. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company’s constitution. Section 126(1): a company’s power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company. The power may be exercised without using a common seal.
Apply the law:
Companies that act outside their capacity are said to have acted “ultra vires”. According to section 125, company’s exercise goes beyond to a company’s constitution will not invalid. That means, although the company’s action goes beyond the constitution, the action will still valid. So, the $2m loan contract between ABC bank and Jim and Peter will still valid. The company should pay the interest that related to $2m loan (Corporation Act, 2001). Moreover, the person who breaches the company’s constitution may be liable for damages (if any) to other shareholders. In this case, the two directors Jim and Peter should be responsibility to their act and bear the damages to other shareholders (Corporation Act, 2001).
In this case, ABC bank do not have any liability. Sambal should give interest for the $2m loan to ABC bank, and asks the two directors to bear all the damages of company’s other shareholders.
In this case, the shareholders of Rich Pty Ltd haven’t been paid a dividend related to their shares for 3 years. Susan who owns 25% shares of the company is one of them. She is convinced that she deserves better and yet, given no reasons, the board of directors refuse to pay a distribution of the company’s profit attached to her shares. Hence, the issue is whether or not the board’s refusal is in breach of duty. If so, what would be Susan’s remedy?
The laws applied in this case are:
a. The oppression remedy: Pt 2F.1
b. An injunction to prevent a contravention of the Corporations Act: s1324
S 232 of the Pt 2F.1 allows the court to provide a remedy to a member where the court finds that: the conduct of the company’s affairs, or an actual or proposed act or omission by or on behalf of the company, or a resolution, or a proposed resolution, of members or a class of members of the company Is either:
contrary to the interests of the members as a whole, or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or in any other capacity.
S1324(2) states that where a person has refused or failed, is refusing or failing, or is proposing to refuse or fail, to do an act or thing that the person is required by this Act to do, the Court may, on the application of: ASIC; or any person whose interests have been, are or would be affected by the refusal or failure to do that act or thing; grant an injunction, on such terms as the Court thinks appropriate, requiring the first mentioned person to do that act or thing.
The board of Rich Pty Ltd has committed oppressive conduct, specifically, unfairly restricting dividends. In this case, the directors refuse to give reasons or explanations of failing to pay dividends. By paying no dividends to the shareholders, the directors can possibly benefit their own interests such as paying them excessive remuneration out of the profits that should be paid as dividends that constitutes oppression. Under s232 of the Corporations Act, remedies where there is oppression allows Susan to seek her rights by an order held by the court to regulate the conduct of the affairs of the company in the future. For example, remove several directors and appoint new directors. Furthermore, according to s1324, the court can grant an injunction to any person who has breached the Corporations Act.
One of the directors’ duties is to act in the interest of the company. To some extent, the members’ interest is the company’s interest. Thus, refusing to pay dividends to members is a breach of duty that contravenes the Corporations Act. Therefore, Susan can appeal to the court to have it grant an injunction against the directors of Rich Pty Ltd. In other words, mandatorily require the board to pay dividends to the shareholders and provide sufficient information to the members. Additionally, the statutory right allows members of a company to seek to inspect the books of the company if they believe that insufficient information are given by directors. However, there are some certain circumstances that failing to pay dividends does not contravene the Corporations Act. For instance, chasing higher profits for the company or suffering a financial crisis.
All in all, the fact that the board of Rich Pty Ltd contravenes the Corporations Act will result in certain consequences, these may include: fine, disqualification order, injunction etc. Speaking of Susan, she may receive the amount of dividends attached to her shares as compensation. Nevertheless, if the directors acted in a good faith or say for the sake of the company, then the board only needs to provide relevant information and explain why they refuse to pay dividends.
Section 249H states that, as unlisted companies, the minimum period of notice are 21 days. The notice period can be reduced by agreement of members holding at least 95% of the votes that maybe cast at the.1 In this case, John, Sam only hold 72% of the shares, they do not have the authority to reduce the period. For listed companies, S249HA of the Corporations Act prescribes a minimum notice period of 28 days. The minimum 28 days notice period required for a listed company cannot be shortened by member/shareholder approval.2 At this moment, Mark should check when they gave him the notice. If it was given less than 21 /28 days before the general meeting, the meeting can be treated as procedural irregularities.
Under this situation, section 1322(2) says if the court is opinion of the irregularities has caused, or may cause substantial injustice that cannot be remedied by any order of the court and the court makes an order declaring the proceeding to be invalid. 249S allows that a company to hold a meeting of its members in two or more venues “using any technology that gives the members as a whole a reasonable opportunity to participate”3. In this case, Mark was unable to reserve a flight from Darwin to Brisbane but he can attend the meeting by using telephone or video conferencing facilities.
In order to get the full answer of question 3, we trace for the origin knowledge back to the textbook, which shows restrictions on members ‘decision making power. It includes:
1. Equitable limitation
2. Special procedural requirements (e.g. reduction of capital)
3. Corporations Act and Listing rules prevented interested members from voting
4. Statutory provisions protecting the minority
5. Member’s personal rights
6. Limit on powers of majority to ratify breaches of dirs duties. We pay the attention to special procedural requirements in restrictions on members’ decision-making power. In this part, we know that majority member can remove directors. However, special procedures exists, include special notice must be given to company 2 months before. In this case, it does not mention the special notice, so Mark could argue it. Another key ingredient is limit on powers of majority to ratify breaches of directors’ duties. Majority cannot ratify dirs breach of duty if:
– it is oppressive
– the result is to prejudice creditors because coy is insolvent when ratification took place
– breach of equitable limitation
– results in a personal right of member being eliminated
Majority cannot ratify director’s breach of duty if it is oppressive. In this case, we know that the relationship between Mark and his cousins broke down. Mark could claim that there is oppression then try to invalid this meeting. Finally, board of directors can delegate certain tasks to committees, a single director, an employee or another person unless constitution prevents it. Although Mark cannot book a flight at the week before Easter, he could do it in this way.
Corporations Act. (2001). s. 125. Retrieved from
http://www.austlii.edu.au/au/legis/cth/consol act/ca2001172/ Hanrahan, P., I
Ramsay, G Stapledon, (2014). Commercial Applications of Company Law, 15th Edition, CCH Australia.