First, the issue in play is fueled by two elemental components. That is, the Beanstalk Ltd Company has a constitution that limits the sale of the agricultural products by the company in Queensland. In addition, the board of directors of the company implemented the policy that the board should approve all the transactions of the company over $100,000. Nevertheless, Jack, who is the managing director of the company, attended a trade fair in Victoria that saw him sign a purchase agreement worth $150,000 with Giant Ltd. This aspect has led to the disagreement of the viability of the contract, especially from the Board of Directors, which has raised issues concerning the same:
Issue 1: Jack’s Lack of Authority to Sign the Contract
According to the Board of Directors, Jack did not have the authority to sign the contract above $100,000 with reference to the company policy implemented by the board of directors. As such, based on the legal company law governing the Directors, it is evident that it is uncustomary for a single director, such as Jack to have the power of entering contracts on behalf of the company without the delegation or approval from the board. For this reason, it is essential for the Giant Ltd management to understand that for all the companies the extent of the management power of the directors can be restricted by the requirement for the approval of the members of the board under the CA, by the constitutional requirements, or in the listed companies, the enforced LR’s (Australia. Treasury, 2004).
Under this case, the company policy enforced by the board restricts the managing director from engaging in contracts exceeding $100,000. The restriction depicts the powers of the Board despite the management powers given to the directors under RRs198A and the aspect that under s124, the management power is inclusive of anything the company has legal ability to perform, including entering contracts, purchasing or selling of assets, and borrowing money among others (Australia. Treasury, 2004). In conclusion, Jack did not have the authority to sign the contract.
Issue 2: Beanstalk Ltd’s Lack of Legal Capacity to Purchase Products from outside Queensland
The second issue raised by the board of directors is that the company had no legal capacity under the constitution to purchase products from outside Queensland. As such, the governing aspect under this issue is the objects clause under the constitution, which specifies the type of business and operations the company can engage. As such, the clause restricts the company from engaging in business outside Queensland (Australia, 2000). As such, entering a contract with the Victorian farm Giant Ltd would mean that the company would be acting contrary to its OC, which would lead to ‘ultra vires’ making it lack the legal capacity to undertake the act.
Moreover, since the constitution is a contract among the parties in the organization, the act of Jack, the managing director were a breach of contract. For this reason, Giant Ltd should understand that the Beanstalk Ltd had no legal capacity to enter the contract and should withdraw from the contract (Australia, 2003). According to s135 of the CA, a company can include a replaceable rule in its constitution through reference or otherwise, which does not apply to it otherwise. In conclusion, since the constitution of the company did not have these replaceable rules, it could not apply to the contract entered by the director, such as in the Norton Case.
Issue 3: Public Record of Beanstalk Ltd Constitution
The third issue raised by the board of directors is that the constitution of the Beanstalk Ltd was available in the public record and Giant Ltd had the responsibility to understand its contents and comply with it. Under the statutory assumptions provided for under s129, an outside has the capacity to make various assumptions of the regularity in its operations or dealings with another company. The Turquand’s Case is an example of this aspect (Australia, 2000). The purpose of the procedure is to protect the outsider dealing in good faith, especially with the individuals who can be expected to have the authority to act behalf of the company, which in this case is Jack, the managing director. Nevertheless, the outsiders such as the Giant Ltd do not need to the knowledge of the constitution, but cannot make the assumption if at the point if dealing they knew or suspected non-compliance (Australia, 2003). In conclusion, based on these reasons, it would be argued that the board of directors has reason to initiate the withdrawal from the contract.
The Corporations Act has various sections that can explain the validity of the constitutional rules adopted by Pan Ltd, which is a company without a constitution but has agreed on a variety of resolutions in the emergent company constitution as follows:
dividends can only be paid if they have been recommended by the directors and declared by the members;
This rule is based off the CA 2001, s254T, which provides the various circumstances in which the dividends could be paid. According to this provision, dividends could be paid unless the assets of a company exceed the liabilities just before the dividends are declared and excess amount is sufficient for the payment of the dividends, when the dividends are reasonable and fair to the shareholders of the company or when the dividends’ payment does not prejudice the ability of the company to pay the debtors materially. In conclusion, based on these provisions, this rule by the Pan Ltd could be deemed invalid (BUS328 Company Law, L,H,W Chapter 5, n.d.).
the transfer of shares in the company requires the approval of the directors;
Under the variation of the class rights, the validity of this rule would be questioned. First, the shares of the shareholders are the personal property and the rights that cannot be amended simply by the authority of the majority or the company’s special authority. Moreover, the law on the class rights in s246 of the CA protects the rights of the holders of different share classes or categories against the cancellation, variation by the company directors or the control of the shareholders (BUS328 Company Law, L,H,W Chapter 5, n.d.). In conclusion however, considering the provision of RR1072F and G, the directors may exercise the power over the transfer of shares, but only if they act in proper purpose for the best interest of the shareholders and company.
Wendy Weird be a director of the company for life;
Despite the provision allowing for the employment of the executive directors full-time, it is not valid to appoint Wendy Weird as the director the company for life. This aspect is also contrasted with the aspect that s201 under the appointment of directors suggests that the directors of listed companies have to stand for elections after every three years (BUS328 Company Law, L,H,W Chapter 5, n.d.). In conclusion, this duration could be altered by different companies, but appointment of directors for life lack validity.
directors of the company are to be appointed by Wendy Weird;
This rule is valid because under s201H of the CA 2001, the directors of a company could appoint a director. That is, an individual could be appointed a director to make up the quorum for the meeting of the directors even when the directors of that company are not sufficient in numbers to make the quorum. In conclusion, if other directors appoint an individual as the director of a company, that company has to confirm the appointment through resolution at the next AGM of the company (BUS328 Company Law, Lecture 3 L, H, W Chapter 4, n.d.).
directors may issue the company’s shares only with the approval of the members.
This rule is valid because the directors first have the capacity and power to exercise and control the transfer of the shares of the members provided it be in their best interest and the interest of the company. In conclusion, nevertheless, this rule becomes valid based on s264B, which ensures that the holders of share class approve any of the proposals to vary the rights attaching to the shares class (BUS328 Company Law, n.d.).
Raising of Funds
Growth Ltd has to understand that the funds could be raised from the existing members as well as the any other individual as well. First, for the existing members, s708 provides for the raising of funds by the share or the debenture holders (BUS328 Company Law, n.d.). Nevertheless, for the other individuals, a full prospectus or offering information statement is necessary, especially where the company plans to list on the stock exchange. In conclusion, the full prospectus has to contain the required information that the investors as well as their professional advisors would need to make the informed assessments of the rights and the liabilities, which attach to the various securities offered and the financial positions.
Information on Investments
The directors are safe from the prosecution if they provide the investors in the prospectus every detail they know that is relevant concerning the investments. That is, the provision of all the information as provided in the securities of the prospectus under s708. On the other hand, if the directors realize the provision of misleading or deceptive statements, various defenses could apply with reference to the criminal or civil liability for the misstatement or the omissions in the disclosure document. One of the most elemental aspects is the defense of due diligence for the prospectuses, which provides that individuals or companies are not liable in case of the deceptive or misleading statement in the prospectus or the omission from the prospectus if it can be proven (BUS328 Company Law, n.d.). In conclusion, the procedure in this case is for the company to conduct the process of due diligence.
Protection for Directors under the CA
The responsible persons include the directors and the underwriters. As such, the CA under s731 gives the persons the due diligence defense provided that they make the reasonable inquiries and believe on the reasonable grounds that the statements were not misleading (BUS328 Company Law, n.d.). The due diligence s731 and the link to the obligations under the s710 for the prospectuses is also another security for the responsible persons, including the directors. Moreover, s733, which is the general reliance defense also acts as protector of the directors because it provides that for all the disclosure documents, there is no liability if they prove that the relied reasonably on the information provided by another medium. In conclusion, for these reasons, the Growth Ltd has to revaluate its options and consider the aspects surrounding the fundraising and the contracts or legal issues involved (FRAWLEY, 2008).
Australia. Companies and Securities Law Review Committee. (1989). Director's statutory duty to disclose interest (Companies Act S.228) and loans to directors (Companies Act S.230). Melbourne: The Committee.
Australia. Treasury. (2004). The Financial corporations act: An information document. Canberra: Australian Government Pub. Service.
Australia. (2000). Australian corporations legislation: Corporations law, corporations regulations, ASIC act and regulations, corporations act, corporations ([state]) act, other legislation. Chatswood, NSW: Butterworths.
Australia. (2003). Corporations Act 2001 reprinted on 16 June 2006 (taking into account amendments up to and including those made by Act No. 17, 2006). Canberra: Attorney-General's Dept.
BUS328 Company Law, L,H,W Chapter 5. (n.d.). Company relations with outsiders[pdf].
BUS328 Company Law, Lecture 3 L, H, W Chapter 4. (n.d.). Constitution and Replaceable Rules [pdf].
BUS328 Company Law. (n.d.). Lecture 5 L, H, W Chapter 7 Fundraising [pdf].
BUS328 Company Law. (n.d.). Lecture 6 L, H, W Chapter 8 Share Capital [pdf].
BUS328 Company Law. (n.d.). Lecture 7 Directors L, H, W Chapter 12 [pdf].
Frawley, N. (2008). The Cost Of Bringing A Statutory Derivative Action In Australia Is It Time To Reconsider The Terms Of Section 242 Of The Corporations Act 2001?