CORPORATIONS LAW
TRIMESTER 2, 2013
Assignment
2 – Case Study
Assessment Value:
20%
Word Length 1500-
2000 words
Question 1. (10marks)
A, B and C have, for a number of years, run a small
unincorporated electrical manufacturing firm.
They recently decided to incorporate a proprietary company to run the
business.Prior to incorporation there
was a discussion between A, B and C about whether the company, when created,
should expand the business to include a retail outlet, or whether the business
should simply continue as it is.A was
in favour of the expansion, while B and C were reluctant (although they did not
reject the idea completely).The
discussion ended without any decision being made.
B and C were responsible for arranging
the registration of the company, to be known as Zap Pty Ltd.As part of this process they decided to use
the replaceable rules as the constitution but with the following changes.There is a clause that restricts the
company’s business to the manufacture of electrical goods, specifing that the
company does not operate as a retailer of such goods.Another clause states that no single director
may bind the company to any contract for the purchase of machinery without the
agreement of each of the other directors.
There is also a clause that varies the replaceable rule in section 198B
of the Corporations Act by deleting
subsection 198B(2).
A was not aware of the contents of the constitution
and, prior to registration, she began negotiating for the company to lease shop
premises which would be suitable for retail activity.She found a suitable shop.The lessor was anxious that the lease should
commence immediately, but A managed to persuade him to agree that the lease
would commence when the company ratified the contract, which would be ‘as soon
as possible’.On 1 April A signed the
lease document “on behalf of Zap Pty Ltd, to be formed”.Unknown to A at that time, the Australian
Securities and Investments Commission (ASIC) had rejected the name “Zap”
because it is already in use.
The company was registered on 30 April as “Sparky
Pty Ltd”.The information supplied to
ASIC with the registration forms shows that the directors of the company are A,
B and C.There are four shareholders: A,
B, C and M (whose role is described below).
At the first directors’ meeting, three weeks after
registration, A, B and C decided (after much discussion) that Sparky Pty Ltd
would approve the lease contract.
Another item of discussion was a contract purportedly entered into on
the company’s behalf by C after the company was registered.The contract was for the purchase of
heavy-duty welding machinery from X.A
and B had no knowledge of C’s actions regarding the contract, and it appears
that C has forged B’s signature on the company cheque for the first instalment
of the purchase money.X is now pressing
for further payment.
M, on hearing about the ratification of the lease
contract is not pleased.
M became a member of the company because he was
able to contribute large sums of capital.
His share rights are the same as those for A, B and C, and all four hold
an equal number of shares.When A, B and
C learn of M’s response to the ratification they fear that he may be an adverse
influence on the company’s progress.
Accordingly they decide to call a general meeting at which they will
propose that the company’s constitution will be amended such that all shares in
the company will have their dividend entitlements removed.A, B and C will, however, continue to be
entitled to receive fees for their work as directors.
(i) A and B seek your advice on the legal
position concerning the machinery contract.
(10 marks)
(ii) M seeks your advice about the validity
of the ratification and on who is liable on the lease. (5 marks)
(iii) M seeks your advice about the validity
of the proposed amendment to the constitution and any remedies he has against
the directors. (5 marks)