Various Issues Relating to the Corporations Act and their Effects on Directors and their Duties
The directors are required by the Corporations Act 2001 not to do anything that requires disclosure to investors. If they fail to do so they are held liable by Sec 45 of the Corporations Act that stipulates the governance of a small proprietary company. According to Peter the constitution of Kandy K restricts the directors to facilitating a loan of not more than one million dollars unless the members pass the resolution in a general meeting as was the case in Howard v Patent Ivory Manufacturing Co (1888) where the decision by the directors to borrow over the stipulated limit was nullified. This also binds the directors 1in as that though they had mandate to borrow money on behalf of the company, the company’s constitution put a cap on the amount they could borrow without a resolution of all members. However the corporations Act of 2001 includes a clause which states that this can be contravened in “limited circumstances”2. This means the directors can refer to the advancement of the new technology as a ‘limited circumstance’ because it is breakthrough technology. As directors it is their duty then to do anything possible3 to promote it and ensure maximum returns for Kandy K Pty.
Apart from being directors of the company, Fred and Doug are also shareholders of the company. This in turn affects their positions as directors of the company in as they hold the rights to vote on member’s issues as they hold a two thirds share of the company in between themselves. Under the corporations Act of 2001 Section 249, issues voted on by a majority at a members meeting with a quorum of two members are valid resolutions. This affects the directors of the company because they wear two hats when it comes to the company matters, therefore their capacity as directors is likely to interfere with their position as members. By the two going ahead to negotiate a contract without the accent of the other member their action overlooks Peter’s rights as a member and at the same time paints a picture of disregard to the minority.
Following the due procedure of the Pty company constitution the directors can convene a meeting whenever they deem necessary as stated in clause 18. This particular clause gives them ability to manipulate the process as they may go ahead and convene a general meeting to resolve this very issue and given they constitute the majority, they will most likely have their way. It is likely that their actions may have been borne out of sheer disregard and in the full knowledge of the fact that they can still manipulate the process.
According to clause 21 of Pty’s company constitution,
“The Directors may exercise all the powers of the Company to borrow money, to charge any property or business of the Company or all or any of its uncalled capital and to issue debentures or give any other security for a debt, liability or obligation of the Company or of any other person.” To this note the directors have some legal backing for their actions4. Borrowing money on behalf of the company is just one of their duties according to this clause.
Furthermore the directors are permitted by the company law to authorize and sign for the loan on behalf of the Company provided that two of director’s signatures appear as stipulated by clause 21 sub-articles three of the Pty Ltd constitution. This means the signatures appearing on the contact with Rucbank are from the responsible parties. This will mean that the directors are well within their mandate5 when they both sign the contract with Rucbank and its validity is very much intact. Hence their duties to the company do not stand to be affected as this is business as usual for the two and only Peter seems to think otherwise.
Another fact to be considered is Fred and Doug’s personal interest in the whole facilitation? If either of the two stand to benefit from this deal and the benefits are not passed down to the company, then they are breaching clause 22 article 6 that requires them to “disclose if they have a material personal interest in that contract arrangement or understanding” in the manner required in Section 191 of the Corporations Act. This affects the directors in that they have to prove that they by no means stand to benefit from the contract with Rucbank personally. If so their duties to the company will have to be put under scrutiny to ascertain that they are not in any way misusing their positions. If they harbor no vested interests then their actions point towards having the company’s best interest in heart and should be commended for it.
Corporate Governance Issues on the Case
First the issue of directorship and membership has served to complicate the situation at Kandy K Pty. The two directors each hold a third of the company’s share. So they both have a membership equal to6 Peter’s but have to perform duties for the company in the director’s portfolio. This situation produces scenarios in which the directors seem like they are trivializing their directors’ conduct owing to the power they hold as shareholders of the company. In this turn of events, the Pty Ltd constitution ought to have put emphasis on defining these two capacities7 to avoid a situation in which they overlap generating conflict. The law has however put the decisions at board meeting on top of all else like in the case of Isle of Wight Railway Co. v Tahourdin (1883) when the court allowed shareholders to interfere in the decision of board of directors.
Another issue in this case bends towards oppressive conduct of affairs which in this case might be in the form of disregard of Peter’s opinion as he is a minority. There is no solid explanation on why the two nominee directors could not call upon the third shareholder and vote on this issue considering their votes were enough to make sure the proposal sail through.
Actions That Can be Taken.
Looking closely at Peter’s situation two things clearly come up; one by being not informed of the impending loan facilitation, the two directors committed an act of omission, two Peter’s hands are not tied and there are definite actions he can take. Starting with the most drastic of the steps he might take and that is by seeking a court order. Under the Corporations Act 2001 SEC 232 one may seek a court to make an order if “an actual or proposed act of omission has been done as concerns the conduct of the company’s affairs” also if “unfair, oppressive or discriminatory acts8 have been performed as concerns the companies affairs”. In Peter’s case omission was in the form of the directors failing to call for a general meeting as stipulated. So as the same Corporations Act specifies in SEC 234, Peter in his capacity as a member of the proprietary company can move to the court and seek an order on any of the following. First he can have the court force the company to wind up its operations, this is more likely if the disagreement generates to irreconcilable differences9. Alternatively as stipulated in the Pty’s constitution, he can ask the court to force the company to repeal or modify Kandy Ltd’s constitution and make clear these borrowing restrictions so as to avoid the same instances in future. In the same breath, Peter may request the court to regulate the company’s conduct in future. His options do not end there as he may chose to restrain the directors from receiving the financial facilitation from Rucbank. This may have wider ripple effects10 because the bank may chose to counter sue for breach of contract resulting in more problems for Kandy Pty.
Oppression against the minority might also be the case as the two directors seem to be ganging up against Peter as they have the majority. This is also a viable reason for him to seek redress11. However he will be required to show how this act is oppressive to him(minority) as was the case in Brown v British Abrasive wheel Co Ltd  1 Ch 290 in which the court ruled against the majority trying to edge out the minority while trying to make it look like a majority vote.
According to the Corporations Act of 2001 Sec249, Peter can call for a general meeting. This is made possible by the fact that members whose votes constitute more than 5% can indeed request the directors to call for a general meeting like in the case of Humes Ltd v Unity A.P.A Ltd (1987). In his case Peter’s vote constitutes of thirty three percent of the votes considering there are three members all with one ordinary share. Through this general meeting he can now be able to raise his issue about the contract with Rucbank and come to a unanimous decision with the rest of members. This by far seems likely to be his most practical approach as it disrupts little to no company business12. There are also ways to forfeit his share of the company with permission from the other two members if he may chose to do so.
In my view, the contract with Rucbank seems to have been entered into in good faith and in the company’s best interest13. Also the constitution for the proprietary company does not include the specific borrowing range restriction that he bases the whole dispute on meaning it was either an informal agreement or a is only contained in the company’s by-laws14. This means that its validity is dependent on overall member support. This is why in the wider scheme of things the contract is likely to be valid.
Allen, William. Ambiguity in Corporation Law . Delaware: J. Corp, 1997.
B, Peter. A Jurisdictional Approach to Collapsing Corporate Distinctions.Washington: Rutgers
Gibson, George. Virginia's Experience with the Model Business Corporation Act (Chicago:
Goldsmith, Jack. Interest Analysis Applied to Corporations: The Unprincipled Use of a
Choice of Law. London: Yale L.J, 1988.
Goshen, Zohar & Parchomovsky, Gideon. “The Essential Role of Securities Regulation.” The
Law Duke 55(2006):70-72.
Kozyris, John . Corporate Wars and Choice of Law. Moscow: Duke publishers, 1985.
Langevoort, Donald. Federalism in Corporate/Securities Law: Reflections on Delaware,
California and State Regulation of Insider Trading . California: U.S.L Press, 2006.
Luce, Kenneth. Trends in Modern Corporation Legislation .Michigan: Ml publishers, 1956.
Maltas D. John, Law (Business Organization) 222/522. Student text on Business Organizations
Law. Curtin: Curtin University Technology, 2009.
Sowards, Hugh L. & Mofsky, James S. Factors Affecting the Development of Corporation
Law. Miami : L Rev publishers, 1969.
Trachtman Joel. Regulatory Competition and Regulatory Jurisdiction. Chicago: Third Watch
Reinier, Kraakman. Anatomy of Corporate Law: A Comparative and Functional Approach.
New York: Oxford University Press, 2004.
Roe, Mark J. “Corporate Law's Limits.” Journal of legal Studies 233 (2002):29-34.
Wymeersch, Eddy. Company Law in Turmoil and the Way to Global Company Practice.
Cambridge: Mirror group, 2003