Case Study According To IRAC Method -House of Lords in Salomon

Questions: 1. Essay Question(i) The Corporations Act allows a person to make assumptions when dealing with a company. Critically analysis, in your own words, these assumptions. In your answer refer to the relevant sections of the Corporations Act.(ii) Outline and describe the circumstances where the courts may find that a person is not entitled to rely on these assumptions. In your answer refer to the relevant sections of the Corporations Act.2. Critically discuss the importance of the veil of incorporation. Case Study 1 You are a director and member of a long established company. There are five members in your company and each member has 20% ownership in the company. The company's constitution states that two directors are required to sign all loan contracts. After working for 20 years with the company as a company director, you believe that you deserve a company car. You walk into a car dealership and buy a sports car valued at $100,000. Once the board found out, they were infuriated.Did you have the power to sign a contract to buy a company car? Is the board bound by the contract?Case Study 2Sarah and Jake are minority shareholders in AAP. They are concerned with some of the decisions being made by the Board are not legal and within the constitution and seek your advice regarding what they can do at the forthcoming AGM.(a) Can they question the Board on the above matter?(b) Can they put a resolution to the meeting condemning the inaction by the Board?(c) What other actions might the group be able to undertake in order to have the company and the directors brought to account? Answers: 1. (i) Section 128 of the Corporations Act, 2001 (Cth) provides that while dealing with a company, a person is entitled to make the assumptions that have been mentioned in section 129. In such a case, the Act provides that a company cannot claim in case of any proceedings related with the dealings that such assumptions are not true. In this way, the provisions of sections 128 and 129 can be said to be the statutory equivalent of the indoor management rule. According to section 129(1) it can be assumed by a person while dealing with the company that the Constitution and the replaceable rules have been complied with. Section 129(2) provides that it can be assumed by the outsiders from the information supplied by the company that the person who appears to be the director of the company secreatry is really so and has been appointed properly and also has the authority to exercise such powers. Similarly, section 129(3) provides that it can be assumed by the outsiders that a person who has been presented as an officer or agent of the company has been duly appointed and such person also has the authority to exercise the powers and perform the duties that are generally performed the exercise by the officer or agent. Section 129(4) provides that it can be assumed by outsiders that the officers and agents of the company have properly performed their duties. In the same way, section 129(5) provides that in case the company does not have a seal, it can be assumed by the outsiders that the document has been executed properly if it is signed by the director or directors according to section 127 of the Act. (ii) However the statutory assumptions provided by the Corporations Act cannot be relied upon by an outsider while dealing with the company if the person is aware that no such authority has been conferred upon the officer or the agent of the company. Therefore if the person knows that the person said to be the officer or agent of the company is not an officer or agent or has not been duly appointed, in such a case, the outsider cannot rely upon the statutory assumptions provided by the Corporations Act. 2. It was confirmed by the House of Lords in Salomon v Salomon that after incorporation, generally a company is considered as a new legal entity that is distinct from its shareholders. One of the major reasons behind the incorporation of a company is the limited liability that is available to the shareholders of the company in case of incorporation. Therefore, the doctrine of limited liability provides that in case, the company suffers a loss, the shareholders only lose what has been contributed by them in the form of shares of the company. However, there is a major exception that is present regarding the general concept of limited liability. In some cases it becomes important for the courts to look through the Corporation or what is known as lifting the veil of incorporation. It is also known as piercing the veil. In this case, the shareholders of the company can be directly and personally held liable for the obligations of the company. The doctrine of piercing the veil is generally invoked when the distinction between the company and the shareholders has been blurred by the shareholders. In this regard, it needs to be noted that although our company enjoys a separate legal identity, still it can only act through human agents. Therefore, there are two situations where a company becomes liable under the corporate law. It is through direct liability in case of direct infringement and through secondary liability regarding the acts of its human agents were making in the course of employment. Although, generally the courts are reluctant to pierce the corporate veil, sometimes it has to be done when liability has to be imposed in order to achieve an equitable result. Case study 1 Did you have the power to sign a contract to buy a company car? Is the board bound by the contract? Issue: In the present case, there are five directors of the company and it has been clearly mentioned by the Constitution of the company that all loan contracts have to be signed by at least two directors of the company. Therefore if only one director decides to sign the contract for purchasing a sports car worth $100,000 for personal use, it cannot be justified. Rule: Although director has remained in this position for a period of 20 years, still it does not mean that the director has got the authority to sign the contract for purchasing the car on behalf of the company (Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd, 2014). Application: But it also needs to be noted in this regard that although the director does not have the authority to sign the contract for purchasing the car, still the board of the company may be bound by the contract. The reason is that while dealing with the company, there are certain assumptions that can be made by the outsiders (Royal British Bank v Turquand, 1856). For example in the present case, it may be assumed by the car dealer that the director has the authority to sign the contract for purchasing the car on behalf of the company. Conclusion: As a result, in such a case, the contract may be binding for the company. However, the board of the company may require the director to compensate the company in such a case. Case study 2 (a) Can they question the board on the above matter? (b) Can they put a resolution to the meeting condemning the inaction by the board? (c) What other actions might be to be able to undertake in order to have the company and the directors brought to action? Issue: The issue that needs to be decided in this case is if Sarah and Jake have certain that can be used by them to deal with the oppressive conduct of the board of the company. Rule: Wide-ranging remedies have been provided to the minority shareholders by the Corporations Act. For example, in the present case, despite being minority shareholders in AAP, Sarah and Jake certainly have the right to question the board of the company if they believe that certain decisions made by the directors of the company are not legal and are against the Constitution of the company. According to section 250S of the Corporations Act, the chairman of AGM should provide a reasonable opportunity to the members as a whole to make comments or ask questions related with the management of the company. Therefore in the present case although the chairman of the AGM does not have a specific duty towards Sarah and Jake, but if they are chosen, they can certainly ask questions. Application: Sarah and Jake can put the resolution in which the inaction by the Board may be condemned. According to section 249N of Corporations Act, it is the right of each member of the company to require it to put resolutions that can be considered as a general meeting. However it is required that the members should have at least 5% of the votes or at least hundred members that are entitled to vote. In such a case, these numbers can give a notice to the company regarding the resolution they want to move at the general meeting. In the present case, the remedy for oppressive conduct provided by the Corporations Act can be used by Sarah and Jake. The orders that can be made by the court in case of oppressive conduct have been provided by section 233. In this regard, section 233(1)(g) states that another can be made by the court under this section that is considered as appropriate by the court. If it is found that the directors are in the breach of their duties, according to section 206C, they can also be disqualified from managing the company. Conclusion: Therefore, Sarah and Jake can avail the remedy for oppressive conduct provided by section 232 of the Corporations Act. References Ford H, Ford's Principles of Corporations Law, 10th ed (Australia: Butterworths 2001), p.658 Frank H. Easterbrook Daniel R. Fischel, Limited Liability and the Corporation, (1985). 52 U.CHI.L.REV. 89 Freeman Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 502 Hanrahan P et al, Commercial Applications of Company Law, 2nd ed (Australia: CCH 2001), p.446 N Hawke, Corporate Liability, London Sweet and Maxwell, 2000, p. 108. Case Law Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd [2014] SASCFC 103 Royal British Bank v Turquand (1856) 6 EB 327 Salomon V. Salomon, House of Lords. (1896), [1897] A.C. 22