Study on pet business

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Relevant law: Section 198 (C) and 201 J of the Corporations Act 2001 (Cth) provides that out of several directors in a company, the company is empowered to appoint any director as the managing director of the company along with conferring any such powers to him, which a director can exercise. Moreover, the courts have stated that even if an exhaustive list of powers is not provided, it is implied that an actual authority is granted to the MD for doing all such things, which may be required within the usual scope of such position.[1] In the case of Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd, it was held that the managing director has the authority to engage the services of others for the company and can also enter into contracts on behalf of the company for the same. In another famous case, Freeman and Lockyer v Buckhurst Park Properties (Mangal), Ltd[1964] 2 QB 480 it was stated in the articles of the company that for constituting a quorum, all the four directors of the company were required. However, one of the directors entered into a contract of the architect alone on behalf of the company without any actual authority. It was held that the company was bound by such contract and that even if a person does not have actual authority for acting on behalf of the company, a contract is still enforceable if that person had the authority to enter into similar agreements, and if the company had the capacity to enter into such contract.

Application of law:

In the given case, Willy Woof is the managing director and entered into a cat contract with Feline Fertility Pty Ltd. On the basis of the above discussed laws and cases, it can be concluded that Willy Woof had the power to enter into a contract on behalf of the company and the company will be bound by such contract. Moreover, the clause of the company’s constitution restricted the breeding and selling of dogs and goods and services associated with dogs and not the cats. Thus, the plea given by the Board of Directors of the Lassie Ltd. that contract was invalid because the constitution of the company did not allow for the trading of cats, does not hold good.

Conclusion:

Based on the above arguments, the cat contract will be enforceable and the Lassie Ltd. company will be bound by it.

(II)

Relevant law:

Section 134 and 140 (1) (b) of the Corporation Act are relevant in this part. Section 134: states that the internal management of the company can be governed by either the constitution or the replaceable rules or by a combination of both. Section 140 (1) (b): states that the replaceable rules as well as the constitution forms a kind of contract between the company and each director, between the company and each member and between each member and another member, under which every director is bound to observe and adhere to the rules and constitution. It was held in the case, Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd[2], that the board of directors is empowered to pass a resolution and amend the constitution, which binds the company, but such a resolution does not confer an implied actual authority on an individual director to enter into contracts with outsider and bind the company on that basis.

Application of Law:

In the given case, after a resolution is passed for the amendment of the constitution of the company that approval of all directors will be necessary for the establishment of a company store outside the Western Australia, then every member of the company will be bound by such amended clause of the constitution. Now, as per section 134 as mentioned above, the directors of Lassie Ltd. will be governed by the constitution and replaceable rules of the company for the management of the internal affairs and also as per section 140 (1) (b) as explained above, the provisions of the company’s constitution will bind each member with another member as a contract does. Thus, Willy Woof will also be bound by the new clause of the constitution of the company.

Conclusion:

Hence, Willy Woof, though being the managing director of the company will be prevented from entering into a lease with Hot Ltd alone without the approval of the rest of the directors of the company.

(III)

Relevant law:

In this part, again section Section 140 (1) (b) is applicable, under which all the members are bound by the constitution. No member can go against the provisions of the constitution unless and until a resolution is passed by all the directors of the company for making an amendment in the constitution for an addition or removal of any provision in it.[3] It was held in a case, Eley v Positive v Government Security Life Assurance Co, the shareholders have the power to sue for any breach of the statutory contract, (created by the company’s constitution), which has been made by the company or other shareholders of the company.[4]

Application of Law:

In the given case, the clause of the constitution of Lassie Ltd clearly provided that Gary Growl will be the General Manager of the company, so any of the members of the company who breaches this clause of the company’s constitution will be equivalent to breach of contract according to section 140 of the Corporations Act, 2001. Thus, Willy Woof’s decision of demoting Gary Growl to the position of sales manager on the basis of his poor does not seem to have ground in the absence of any evidence. Such a decision is equivalent to breach of the constitution and hence the contract between the members, which was formed by the constitution. Moreover, even if Willy Woof finds that Gary Growl had poor management, he must prove it the court with any evidence for the same and must prove that Gary Growl did not fulfill the duties of a director properly due to carelessness and negligence and deserves to be demoted to the position of sales manager. Otherwise, decision of Willy Woof is not justified.

Conclusion:

Based on the above arguments, it can be concluded that the court would order the reappointment of Gary as General Manager on the grounds he has put forward.

(III)

Relevant law:

The non-compete clause included in an employment contract implies when an employee enters into an agreement with the employer that he will not start any business or profession in competition with the employee. This depends on the terms of the contract whether it is meant for only during the term of employment or even after the termination of employment. The main purpose is that section 183 of the Corporations Act, 2001 should not be violated. Section 183: Any person, who being the director of the company obtains some information should not use such information for his own or any other person’s benefit or which is detrimental to the company. In a case, Gilford Motor Co Ltd v Horne, the facts were like Horne was the Managing Director of Guildford Motor and he had a legal obligation of not competing with the Co. He resigned and competed through Co formed in the name of his wife. It was held that such new company was a sham.[5]

Application of law:

In the given case, the clause in the employment contract of Gary with Lassie Ltd contained that he must not compete with the company’s business during his appointment or after termination of his appointment. Thus, if Gary sets up a company called ‘Poodle Pty Ltd’ to sell different types of dogs, he makes a breach of the compete clause. Moreover, it is possible that he might also misuse the information gathered during his employment Lassie Ltd for the benefits of the Poodle Pty Ltd. Consequently, he will be liable for such a breach. His argument that Poodle Pty Ltd. is a separate legal entity will not hold good because the business of the Poodle Pty Ltd. will still be in competition with the Lassie Ltd and hence will be an infringement of the clause of the employment contract.

Conclusion:

Lassie Ltd is likely to be successful in its action of restraining Gary and Poodle Pty Ltd from engaging in a competing business.

(V)

Relevant Law:

The duties of the directors and other officers of a company have been imposed by the Corporations Act 2001 (Cth). These responsibilities have been recognized under common law also. Section 180 (1): that a director or any officer of the company must discharge the duties and exercise the powers with the degree of care and diligence which any reasonable person would exercise, if he were a director or officer of that company in the same circumstances and had the same responsibilities in the company as the director or officer.[6] Section 181: provides that every director or officer of the company must exercise the powers and discharge the duties in good faith, which is always in the best interest of the company and for an appropriate purpose. Sections 182-183: provide that it is the duty of the director of the company that he should not take misuse or take advantage of his position or any information for his personal benefits or for causing detriment to the company.[7] It is recognized as a conflict of interests of the director, arising due to his position of being a fiduciary in different companies. Section 191-195: provides that a director or member of a company, who has any material personal interest in the company must disclose to all other members of the company with a notice of that interest. This notice must be given as soon as the other directors become aware of such interest. Section 588 G: provides that it is the duty of a director not to trade while the company is insolvent and if he does so knowing, he is liable for criminal action against him. A director or officer of a company is liable for any action against him if he is reckless, acts with a dishonest intention, fails to discharge his duties and exercise his powers with in good faith, for a proper purpose and in the best interests of the company. Or, if he uses his position dishonestly to his own advantage or makes use of any information obtained for the same purpose. In Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254, Lifting the corporate veil was defined for the first time, as that if a new individual company is created, although it possesses a status of a separate legal entity, but on some specific occasions, the courts may look behind the legal entity to the real controllers of the company. This implies that the separate identity of the corporation is ignored and the shareholders of the company are held responsible for the actions of the company as if they were shareholders’ actions.[8] In Jones v Lipman, Lipman entered into a contract for selling his land. In order to avoid the completion of the transaction, he transferred the land into a company, which was controlled by him. It was held that the company was used as a tool for avoiding the Lipman’s contractual obligations. Thus, the court pierced the veil and company had to comply with Lipman’s contractual obligations.[9]

Application of Law:

In the given case, Gary was the founder of the Lassie Ltd and held 25% of the total shares. Moreover, as per a clause of the constitution of the company, he was the general manager of the company. Thus, being a shareholder and general manager of the Lassie Ltd, Gary has all of the above responsibilities and the liabilities. In short, in spite of the fact, that Gary created a new, separate company, the rule of lifting the corporate veil will still make him liable for any of the acts done by his company.

Conclusion:

By creating a company and selling his own business to that company, Gary will not be able to escape the liability. If any of the wrong acts will be done by the company, Gary will still be liable for the same.

(VI)

Relevant Law:

Section 588G: provides that it is the duty of a director to ensure that a company is not engaged in insolvent trading. When a company continues trading and incurring debts, even at the time when the company is either insolvent or is on the verge of becoming insolvent, then it is said that Insolvent trading has occurred. Even if a company does not successfully keep its financial records, it is presumed to be insolvent. The directors have the duty of protecting the members as well as the creditors from such decisions, which may possibly lead to insolvency. If the directors fail to do so, they may be held personally liable by the court to the creditors. Moreover, the directors manage and run the company in the name of as well as on the behalf of the shareholders (means owners). Any liability of the company, thus extends to the liability of the directors as well as shareholders. Similarly, any cost which is incurred by the directors for the purpose of protecting themselves from the liability is also ultimately borne by the company itself.[10]

Application of law:

In the given case, on the basis of the above arguments, it can be said that when Lassie Ltd goes into liquidation, the creditor Doggy Pty Ltd. will be able to recover the amount from the company Lassie Ltd, its directors as well as the shareholders.

Conclusion:

The company Lassie Ltd, its directors as well as the shareholders, all will be collectively liable for the payment to the Doggy Pty Ltd.

References:

James, Paul, Ian Malcolm Ramsay and Polat Siva, 'Insolvent Trading - An Empirical Study' SSRN Journal Bostock, Tom, 'The Corporations Act 2001' (2012) 2002 ac Keay, Andrew and Michael Murray, 'Making Company Directors Liable: A Comparative Analysis Of Wrongful Trading In The United Kingdom And Insolvent Trading In Australia' (2005) 14 Int. Insolv. Rev. Macey, Jonathan R. and Joshua Mitts, 'The Three Justifications For Piercing The Corporate Veil' SSRN Journal 'Corporations: Effect Of Decision Of Directors And Shareholders In Determining Whether Their Act Is Within The Express Or Implied Powers Of The Corporation' (1917) 15 Michigan Law Review Lowry, J. (2012). The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors: Australian Securities and Investments Commission v Healey. The Modern Law Review, 75(2), pp.249-260. Langford, R. (2011). The Duty of Directors to Act Bona Fide in the Interests of the Company: A Positive Fiduciary Duty? Australia and the UK Compared. J Corp Law Studies, 11(1), pp.215-242. Tomasic, R. (2001). Governance and the evaluation of corporate law and regulation in australia. Corporate Governance: The international journal of business in society, 1(3), pp.24-32. WaterhouseCoopers, Price,A Guide To Directors’ Duties And Responsibilities For Non-Listed Public Companies And Proprietary Companies In Australia(1st ed, 2011) http://etraining.communitydoor.org.au/pluginfile.php/608/course/section/95/GuideDirectors_Apr08.pdf Australian corporations law. (1992). The CPA Journal, 62 (10), 12. Gilligan, G., Bird, H. and Ramsay, I. (n.d.). Regulating Directors' Duties: How Effective are the Civil Penalty Sanctions in the Australian Corporations Law?. SSRN Journal. Halpin, Andrew, 'RIGHTS, DUTIES, LIABILITIES, AND HOHFELD' (2007) 13 Legal Theory S., N. (1961). Delegation of Duties by Corporate Directors. Virginia Law Review, 47(2), p.278. Ratcliffe, T. (2008). The Companies Act 2006 and key changes to the duties of directors. Strategic Direction, 24(5). Farrer, J. and Ramsay, I. (1998). Director Share Ownership and Corporate Performance - Evidence from Australia. Corporate Governance, 6(4), pp.233-248. Irish, Leon E., 'Corporations: Officers And Directors: Liability For Representative Acts Under The Sherman Act' (1963) 61 Michigan Law Review 'Corporations. Corporate Powers And Their Exercise. Contract Purportedly Authorized By Shareholders And Ratified By Interested Directors Held Enforceable' (1951) 64 Harvard Law Review. Schwank, F., 'Austrian Private Foundations: Directors' Duties And Liabilities Under Close Scrutiny' (2007) 13 Trusts & Trustees Lim, Ernest, 'Directors' Duties: Improper Purposes Or Implied Terms?' (2013) 34 Legal Studies Taylor, Chris, 'The Company Director: Powers, Duties And Liabilities20121peter Loose, Michael Griffiths And David Impey. The Company Director: Powers, Duties And Liabilities . Jordans, 2011. £79.00, ISBN: 9781846611599 11Th Ed.' (2012) 54 Int Jnl Law Management
[1] John Lowry, 'The Irreducible Core Of The Duty Of Care, Skill And Diligence Of Company Directors: Australian Securities And Investments Commission V Healey' (2012) 75 The Modern Law Review [2] (1991) 6 ACSR 464 at 476; 'Corporations. Directors. Company Held Liable For Removal Of Managing Director Following Merger And Adoption Of New By-Laws' (1940) 54Harvard Law Review. [3] 'Corporations: Effect Of Decision Of Directors And Shareholders In Determining Whether Their Act Is Within The Express Or Implied Powers Of The Corporation' (1917) 15Michigan Law Review. [4] (1875) 1 Ex D 20 [5] [1933] Ch 935 [6] Price waterhouseCoopers,A Guide To Directors’ Duties And Responsibilities For Non-Listed Public Companies And Proprietary Companies In Australia(1st ed, 2011) [7] Rosemary Teele Langford, 'The Duty Of Directors To Act Bona Fide In The Interests Of The Company: A Positive Fiduciary Duty? Australia And The UK Compared' (2011) 11 J Corp Law Studies. [8] (1986) 5 NSWLR 254 [9] [1962] 1 WLR 832 [10] Andrew Keay and Michael Murray, 'Making Company Directors Liable: A Comparative Analysis Of Wrongful Trading In The United Kingdom And Insolvent Trading In Australia' (2005) 14Int. Insolv. Rev..
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