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Company Contract: Constitutions and Director Role

Paper Type: Free Essay Subject: Law
Wordcount: 2918 words Published: 19th Sep 2017

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Question 1.

Is the contract enforceable against Beanstalk Ltd owing to the fact that Jack did not have the capacity to enter into that kind of contract?

Employees of a company have a clear mandate on their powers and this are usually spelt out in the in the articles and memorandum of association of a given company. The corporation act has come in handy to address this scenario. Section 124 dwells on the powers of the company and its legal status. Sec 124 (2) provides that a company legal capacity to do a particular thing is not affected by the fact that the company interests are not served by doing it. Section 125 of the CA is to the effect that a company constitution may have an express restriction on the way a company may exercise its powers. Suffice to note that the exercise of a power by the company is not invalid merely because it is contrary to an express restriction or prohibition in the company’s constitution. Subsection 2 is to the effect that an act done by the company is not invalid merely because it is contrary to or beyond any objects in the company’s constitution.

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Sec 126 is to the effect that an agent appointed by the company and he has the power to make, vary, ratify or discharge a contract. The person may be exercising express or implied authority and on behalf of the company. The power may be exercised without using a common seal. The court always takes the view that the duty to act in good faith in the best interests of the company means that the directors must act in the interests of the shareholders as a collective group as illustrated in the Greenhalgh v Arderne Cinemas Ltd[1]. In addition to the above sections, section 128 entitles one to make assumptions in section129 in relation to dealings with a company. The company is not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect. Section 130 on the other hand is to the effect that a person is not taken to have information about a company merely because the information is available to the public from ASIC.

Section 128(4) is to the effect that a person is not entitled to make an assumption in section129 if at the time of the dealings they knew or suspected that the assumption was incorrect. Section 129(b) details the presumption in section 128. Section 129(2)(b) is to the effect that one may assume that a director has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.

In our case scenario Beanstalk is obligated to pay even if Jack surpassed his powers unless they can prove that Giant ltd were aware of the limitations imposed on jack and they disregarded them.

The Beanstalk constitution was available in the public record and Giant ltd had an obligation of knowing and complying with the con tents

Section 130 of the CA serves to address the issue of notice on the limitations imposed on the directors or agents of the company. It provides that the company cannot escape liability on the premise that the person dealing with the company should have been aware of the limitations. The two Sections just before section 130 are of the following effect: Section 128(4) is to the effect that a person is not entitled to make an assumption in section129 if at the time of the dealings they knew or suspected that the assumption was incorrect. Section 129(b) details the presumption in section 128. Section 129(2)(b) is to the effect that one may assume that a director has authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.

One also need to look at the organic theory which states that where the agents of the company acts within the boundary of powers conferred to them by the company constitution or replaceable rules, then they are deemed as being the company itself as was illustrated in Northside Developments Pty Ltd v Registrar-General[2]. But this may always turn out not to be true as was espoused in the case of Smorgon v Australia and New Zealand Banking Group Ltd[3], where it was observed that such an act requires the attribution of mental states to corporations

Company’s legal capacity

At common law the company could only enter into legal obligations only if its’ constitution so authorizes. Any part to the contract was deemed to be aware of any restrictions contained in the constitution of the company. Capacity is catered for under Corporations Act 2001. Section 124 accords the company the same legal capacity as an individual and this encompasses power to make an agreement. S 125is to the effect that performance of an act including entry into an agreement by the company will not be invalidated merely on the premise that its beyond the power of the company’s constitution. Thus Giant limited will not be stopped from staking it claims of payments merely because Beanstalk limited had made it constitution public as provided for under s125. Section 128 and 129 are to the effect that where one enters into any dealing with the company on the belief that he is dealing with the right person, then the company will have to honor its obligations. Thus despite the constitution being made public, section 129 and 130 states that the company is still bound by the acts of it officers who are duly appointed to carry out such a task. Thus beanstalk will have to prove that despite Giant ltd being aware of the limitations, they violated what was in the public domain.

Question Two

Pan Ltd is a company without a constitution. At a members’ meeting five items of business were passed as special resolutions and placed in a new constitution of the company. These were:

  1. that dividends can only be paid if they have been recommended by the directors and declared by the members;


Dividends are the payments made out to shareholders when the company is a going concern and if the directors have approved such payments. They can only be paid if the company assets are sufficiently in excess of its liabilities immediately the dividend is declared and if the dividend is fair and reasonable to the company shareholders as a whole and this does not prejudice the company ability to pay its creditors. This is governed by sections 254T and 254U.

(b) That the transfer of shares in the company requires the approval of the directors;

Transfer of shares

A shareholder in a company who wants to terminate his relationship with the company may decide to offload his shares by way of sale. The shareholder may encounter some difficulties if he wants to sell the shares to an outsider of the company. Some of the difficulties which may arise under the replaceable rules are:

  • The directors have the discretion to refuse to transfer the shares and
  • There might a restriction in the company constitution (if any) on shares transfers. Sections 707. Section 140(2) stipulates that a member may refuse to be bound by modifications after becoming a member if such a modification imposes or increases restrictions on the right to transfer the shares already held by the member, unless the modification is made: or (i) in connection with the company’s change from a public company to a proprietary company under Part2B.7; or (ii) to insert proportional takeover approval provisions into the company’s constitution.

Thus the discretion of shares transfer lies with the directors unless a contrary intention as envisaged in section 140 (2) is adduced.

  1. that Wendy Weird be a director of the company for life;

The CA doesn’t set the specific time for retirement of directors. One can only fail to serve as a director under the circumstances contemplated in Part 2D 3 of the CA. this can be removed by members through the annual general meeting, through resignation or incapacity. To this end one can be a director for life.

Those directors of the company are to be appointed by Wendy Weird;

A director may appoint another director under section 201 H (replaceable rule—see section135). A person can be appointed as a director with a view of the company establishing the requisite quorum for a directors meeting. Section 201J provides that the directors of a company may appoint 1 or more of themselves to the office of managing director of the company for the period, and on the terms (including as to remuneration), as the directors see fit. To this end Wendy can be appointed under the conditions envisaged in the above sections.

  1. That the directors may issue the company’s shares only with the approval of the members.

Directors have the powers to issue new shares as provided for under section 254D. Before issuance of new shares of a given class, the directors of a proprietary company must offer them to the existing shareholders of that class. The directors must give the shareholders a statement setting out the terms of the offer.

Question Three

In order to obtain the funds necessary to expand its business Growth Ltd is to make a $M20 share issue. Advise the directors of Growth Ltd over the following matters.


  1. Can the funds be raised from existing members or anyone else without a prospectus? (2 marks)

There are several ways of raising funds by companies in Australia. Public companies (i.e. those with more than 50 non-employee shareholders) can raise funds from the general public by issuing securities. Private companies (ie ‘proprietary limited’ companies that have no more than 50 non-employee shareholders) on the other hand can raise funds:

  • From existing shareholders and employees of the company or a subsidiary company, and from the general public if the fundraising does not require a disclosure document. Section 708 is to the effect that any personal offers of a body of securities do not require disclosure to the investors. But this doesn’t apply to offers which might amount to indirect issue.

Vital documents one is supposed to give potential investors when raising funds? As a general rule of procedure, if a public company is desirous of raising capital or offering securities for sale (for example shares or debentures) a disclosure document must be availed to the potential investors. This is document whose main purpose is to describe all regulated fundraising documents for the issue of securities (for example shares or debentures).

All companies which are allowed to raise funds can use a prospectus. A company also relies on an offer information statement or a profile statement and this is informed by the type of fundraising one intends to carry out and whether the restrictions imposed by virtue of using these documents are satisfied.

Offer information statements An offer information statement (OIS) has in it a lower threshold for disclosure but can only be used for fundraising up to $10 million. If the company intends to use an OIS then it is required to include a copy of an audited financial report with a balance date within the last six months.

Profile statements This is a document which sets out limited key information in relation to the company and the offer. This kind of statements can only be relied upon if ASIC has approved their use. To this end a company can raise funds from without reliance on the prospectus. In summary, a disclosure document is not required when:

  • an offer is a personal offer, and if:
    • offers or invitations have been made to fewer than 20 persons in the previous 12 months, and
    • the new offer will not result in more than $2 million being raised in that 12 months;

Note: you must not advertise the offer when you rely on this exemption

  • the offers are made to specified people who are presumed not to need disclosure because of their financial capacity, experience, or wholesale status;
  • the offers are made to current holders of the securities;
  • no money or other form of payment is payable for the securities;
  • other disclosure regimes under the Corporations Act apply (i.e. takeovers, schemes of arrangement);
  • The offer is made by certain types of financial institutions.
  1. Will the directors be safe from prosecution if they provide to investors in a prospectus everything they know that is relevant about the investment? (2 marks)

The Corporations Act does not detail out everything that ought to be included in the prospectus. But section 710 is to the effect that a prospectus must contain all information that the investors (and their professional advisers) would reasonably require, and reasonably expect to find in the prospectus. This information should be availed so that the investors can make an informed assessment of material matters relating to the company and these do include:

• The assets and liabilities, financial position, profits and losses and prospects of the company.

• The rights attaching to the securities being offered.

Some other information such as terms and conditions of the offer, disclosure of certain payments made to the directors and advisers in connection with the IPO and the expiry date of the prospectus must be contained in the prospectus.

To this end the directors will be immune from prosecution as they will not have breached any requirement bestowed on them.

  1. If the company issues a prospectus and the directors then become aware that there is a false and misleading statement in it, what alternatives are available to them under the CA? (3 marks)

Where a company directors have become aware of a false or misleading statement in the prospectus which has already been issued to the public, the can petition the ASIC to issue Stop Orders. Though these are the preserve of the ASIC to issue this can be sought so that the issues can be rectified on time.

Stop orders: what they are and when we will issue one section 719 A stop order is an administrative mechanism that allows ASIC to prevent offers being made under a disclosure document where we believe it contains:

  • a misleading or deceptive statement
  • an omission of information required to be provided under the legislation, or
  • a new circumstance has arisen since the disclosure document was lodged.

Where a stop order is issued on a disclosure document, then the company is not allowed to offer, issue, sell or transfer its shares while that order is in force. An interim stop order may be sought for up to 21 days during which time the company will be accorded a hearing to put across its views to an independent delegate. It’s after the hearing that the interim stop order may be lifted or a final stop order on the disclosure document may issue. .

  1. Does the CA provide any protection for directors where funds are raised under a prospectus that contains a misleading statement? (3 marks)

The liability for directors under corporation falls under section 1308, which provides inter alia that misleading misstatements amounts to a crime and such an offence, is one of strict liability. The CA offers protection to directors by availing the following defences. There are a range of defences available to potential civil and criminal liability, some of which include:

• The ‘due diligence defence’, that is, that the person has made all enquiries which were reasonable in the circumstances and having made these enquiries, they believed on reasonable grounds that a statement was not misleading or deceptive or that there was not a material omission from the prospectus.

• Where a new circumstance has arisen and it can be established that the person was not aware of the new matter.

• Establishing that the person reasonably relied on information provided by someone outside the company, such as a professional adviser, for statements contained in the prospectus

But the director should not conceal such information when it comes to his attention.

[1] [1946] 1 All ER 512 (CA)

[2] (1990) 170 CLR 146

[3] [1976] HCA 53


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