Introduction to constitution and legal issues

Discuss about the Constitution and Legal Issues.

The replaceable rules or constitution of a company provide the guidance which the officers and directors of the organisation abide by in order to carry out the responsibilities with respect to the organisation. The clauses of relationship with any third party as well as its members are set out by the constitution of the organisation[1]. This part of the paper discusses about effect the Constitution have with respect to the relationship between the members of the company. This part also discusses whether our constitution can be amended and what are the requirements and process involved in amending the constitution. The paper also discusses remedies available to a member whose rights have been violated by the directors or majority shareholders of the organisation. There are two primary issues which needs to be determined in relation to this part of the paper. Firstly the issue is whether it is within the powers of Som to impose the term which is incorporated into the constitution of Chocolate Cleaning Products Pty Limited (CCP) in relation to him being the solicitor and not being replaced unless there is negligence. Another issue which needs to be determined in relation to this question is whether the directors of the company can change successfully its constitution as per the rules of the Corporation Act 2001 (Cth).

Section 140 of the corporation act deals with the effect of replaceable rules and the constitution of the company. Subsection 1 provides that the terms of the constitution and replaceable rules of a company have an effect in form of a contract between each member of the company and the company, between the members of the company with each other and between the director and company secretary with the company. According to the contract each person agree to abide by its terms as far as they are applicable on them. Unless there is an agreement between the members of a company to be bound in writing search members cannot be found with respect to any alterations in the constitution which has been made after they have become members. These alterations should be related to asking a member to take up additional shares, increasing the liability of the member my asking to pay money to the company or contributing to the share capital and  imposing limitations on transferring shares which are held by the member[2].

Section 140 of the CA

In the case of Lion Nathan Australia Pty Ltd v Coopers Brewery Limited it was provided by the court that the constitution of a company has the same nature like a commercial contract between two or more parties and the violation of which results in contractual remedies.

According to the provisions of this section the constitution of the company can be changed by passing a special resolution by the shareholders of the company. However if there is a further Clause mentioned in the constitution the clause has to be complied with before the clause can be amended. In addition in order to amend such condition the condition itself has to be complied with before being amended[3].

Section is related to providing remedy to a person under section 234 of the CA whose rights have been violated, prejudice or unfairly discriminated by an act or resolution or a proposed act or resolution[4].

As per section 232 any order can be made by the court including a specific action, injunction, winding up of the company and modification or repealing the existing constitution[5].

Proceedings can be brought under section 233 by any person who is a member of the company a person who has been removed as a member of the company as a result of specific reduction[6].

Relevant cases in relation to Section 232-234

Gambotto v WCP Ltd[7] the court held that the majority has to provide that the act was overall fair and not prejudicial in case it is related to the Expropriation of shares.

The constitution of CCP provides that Max can be only removed as a solicitor of the company if negligence have been committed by him while discharging his duties in relation to the company. Section 140 as discussed above establishes the contractual relationship between the members of the company. Thus the directors of the company have been imposed with a duty by the constitution not to remove Max as a solicitor if he has not committed negligence. In addition as this conduct of the directors can be seen as an oppressive and unfair conduct Max can claim remedies under section 232 by seeking an order under section 233 as he is eligible to do so under section 234 being a member of the company. The court may order the directors not to remove Max as a solicitor as it has the power to do so under s233.

Cases on Section 140 of the CA

The directors of the company want to change the constitution. As per section 136 the constitution can be changed by the passing of a special resolution which has been done so by the directors as they have the voting number required.. Max may prevent the directors from changing the constitution under Section 233 of the CA by obtaining an order to repeal the change of the Constitution made by the directors. This is because under section 232 which is related to oppressive remedy an order Max’s right are being oppressed by the directors. Max is a member of the company as he has been provided through will 5% shares of the company. Thus he is entitled to make a claim under section 232

Conclusion

The directors cannot remove Som as the solicitor of the company and they cannot change the constitution in relation to the expropriation of shares under the provisions of section 140, 136 and 232-233.

Directors of an organization are obligated to observe certain standards and follow certain guidelines in relation to the facts of their operation with respect to the company they have been appointed to manage. These standards and guidelines are known as directors’ duties to a company which are provided in from of statutory duties and equitable duties.  The principal legislation setting out the statutory duties of director is the Corporation Act 2001. The equitable directors’ duties are set out through various landmark cases and common law[8]. The major issue to be determined in this part of the paper is to find out whether any of the duties have been violated by the directors of Aussie Boats Ltd (“AB”). The applicable remedy for the breach of duty is also provided through this part.

1. The duty to base action towards proper purpose and to observe good faith towards the action
2. The duty to be loyal towards the company
3. The duty to avoid conflict of interest and prioritise the organization interest if such situation comes up. In such situation priority always needs to be given to the company’s interest rather than personal interest[9].

Section 180

Subsection 1 provides a duty which asks the directors to deploy appropriate diligence and skill while discharging their powers. Whether skill and diligence have been deployed appropriately is identified objectively through engaging a reasonable director (imaginary) in similar position and comparing the actions of the imaginary director with the real director.

Subsection (2) provided business judgment rule. The rule is a defence which can be used by the directors of the company. The defence is useful against the violation of any duty by the director. According to the defence t is the right of a director to determine the level of risk which a company is willing to take in relation to its purpose. Whether the defence has been appropriately used is also determined objectively through the above discussed test.[10]

Section 136 of the CA

Section 181

The section ask the directors to act in proper purpose applying bona fide intentions while exercising their powers. The duty is consistent with the equitable duty of acting in proper purpose and good faith[11].

Section 182

The power gained by the directors through the application of their position must not be misused by them. They are not allowed to make personal gain by using the position and case disadvantage to the company. The duty is also consistent with the equitable duties of directors[12].

Section 183

This duty is related to conflict of interest and similar to that of section 182. Here the directors instead of position must not use any information which have been accessed by them as they are the directors of the company to achieve own advantage by causing loss to the company[13].

Remedies and penalties for the breach of duties by the directors

Section 206 C

Through the application of this section the court has the power to disqualify or suspend a director of a company to manage any company for a prescribed period of time in case the directors are guilty of breach their duties[14]

Section 1317E

The section provided civil penalties for the directors which include fines in case the breach made by the director is considered as a serious breach[15].

Section 233

As discussed in the previous question

Section 1324 gives defence to the directors id they have violated the duties[16]

(ASIC) v Cassimatis[17] -In this case the director who had been found guilty of violating his duties had been imposed with a fine of $100000 as well as was disqualified from being a director of any company for two years.

ASIC v Lindberg[18] – In this case the court found that if the directors do not work in the best interest of the company and do not use their deploy diligence and skill towards the operation they are liable for the violation of section 180(1) of the CA, where actual loss incurred by the company is not essential to determine breach.

In the given circumstances the directors of Aussie Boats Ltd (“AB”) are finding it difficult to compete with the other companies who also deal in boats. They are also feeling threatened by one of their competitors who are planning to a make takeover bid as the competitor has purchased their shares. The competitors have a reputation of removing the executive directors once they have successfully made a takeover.

Section 232 of the CA

It can be evidently said that the issue of new shares to raise further capital and giving consideration to another accompany for preparing a report done by AB is out of the fear that the position of the director may be in danger if a successful takeover bid in made this is because the company is nearing insolvency and a reasonable directors would not take the same action as per section 180(1) of the CA. In the same way as any reasonable director would not have done so the defence under section 180(2) (Business Judgment rule) would also not be applicable. It can be stated further that the directors are not acting in good faith which violates section 181 of the CA. This is because it would not be for the best interest of the company to risk another venture while it is making losses.  In addition section 182 and 183 of the CA have also not been complied with as the directors are using the information and position they have to secure personal interest which is the fear of getting removed as the directors of the company. Thus as the duties have been breached the directors are liable to civil penalty provisions according to section 1317E and 206C of the CA which may make them liable to financial penalties as well as suspension from managing the corporation. The directors can also be held personally liable for any loss incurred by the company as they have violated section 588G by doing insolvent trading. In addition the Non-executive director can make a claim against the directors under section 232 of the CA.

Conclusion

The directors have violated the equitable and statutory duties they owe to the company. The defence under section 180(2) would not be applicable they may claim defence under section 1324 of the CA. They are liable under section 1317E and 206C and remedy against their action can be obtained under section 233 of the CA.

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