Company Law Assignment Essay
Companies and corporations are regarded as juristic entities as per the law due to their ability to exist as single and separate units. This means that these institutions have the liberty to be invested in by individuals who should also be ready to account for the limited liabilities. There are numerous activities that take place in any company and it is important to legislations that oversee these activities Company Law Assignment Essay. Company law is the relevant branch of law that is assigned the role of dealing with any activities that revolve around corporate or business activities.
This branch of the law also governs the internal affairs of a company and makes sure that all the rules and regulations are adhered to religiously. What’s more, company law also studies how the directors of a company, their stakeholders, members of staff and investors conduct themselves around the business. There is usually a special code of conduct that is required to be observed by each of these parties such that if it is breached, then they are held accountable. Company Law Assignment Essay Company law aims at maintaining sanity in organizations so that the operations can run smoothly without any hitches. This paper is a comprehensive and incisive essay that focuses on the importance of company law by analyzing a given case study of the Nature Now Pty Limited Company.
Part A: Consider the actions of the directors of Nature Now Pty Ltd, and discuss whether any of them are in breach of any of their directors’ duties.
Questions and Hints:
Consider each director separately.
The directors’ duties refer to a set of common and statutory obligations that are set by the board members of a company. These duties form an integral part of the company law and there are certain jurisdictions that require to be fulfilled in the process (Hayne 2014, p. 797). The company law stipulates that the duties of the directors of any legal company or organization require them to perform the functions in accordance to the requirements of the firm. Additionally, the directors are required to perform these roles strictly for the company and not to any individual member such as an employee, manager or stakeholder (Hargovan 2014, p. 279).
At the same time, company law expects the directors of a company to remain loyal to the company and avoid any conflict of interest (Hargovan 2014, p. 279). Furthermore, directors are also required to display and maintain a very high level of morality and ethics so that they can be competent in their work. In addition, diligence and good faith are very important to any director because it helps them strive for the success and triumph of the organization (Hargovan 2014, p. 279).
The lack of adherence to these duties is regarded as a breach of contract by the company law (Hargovan 2014, p. 279). In this case study, Nature Now Pty Limited Company has three directors, namely Yasmin, Stacy and Wes. The three directors can be considered to have breached their directors’ duties in one way or the other. Company Law Assignment Essay To begin with, Yasmin is the managing director of the company which means that she supervises and oversees a large part of the company’s affairs. However, Yasmin is having a romantic relationship with Wes, who is a non-executive director of the company. According to company law, both Wes and Yasmin have breached the directors’ duties because they are involved romantically. This results in a conflict of interest because they can be swayed to cultivate on their own interests instead of those of the company (Lowry 2012, p. 249).
Moreover, the fact that Wes is the boyfriend of Yasmin means that he relies on her girlfriend a lot to conduct the corporate affairs of the firm. Consequently, Wes has no interest in the affairs of the company and has little knowledge about what goes on internally. This is also another breach of the directors’ duties because Wes is expected to display a high standard of competence and diligence to ensure that the fir runs smoothly. Additionally, Wes is not loyal to the company because he is not interested in its affairs and the relationship has also created a conflict of interest. The third director is Stacey, who acts as the financial director and controls the business together with Yasmin Company Law Assignment Essay. Jointly, Stacey, Yasmin and Wes are in complete breach of their duties as directors because they voted to purchase camping equipment from a company that was owned by two of them.
This directly creates a huge conflict of interest because Stacey and Yasmin are focused on enriching their own company which they jointly own. Apart from Outdoors Pty Limited being owned by two directors, the firm provides their equipment at double the price. Hence, this does not contribute to making the Nature Now Pty Limited Company successful, but instead creates a leeway for doom. Another breach of the directors’ duties on the side of Stacey is the fact that she decided that the firm should expand to Fiji, without providing any financial forecasts. Despite Fiji being an untapped market, Stacey did not conduct a market research to find out whether the company would remain profitable if it ventured into this country (Lowry 2012, p. 249). Moreover, no legal information was provided prior to the decision to expand to Fiji. Therefore, the three directors of the Nature Now Pty Limited Company have breached their duties in one way or the other.
Identify relevant sections of the Corporations Act 2001 (Cth) and apply these to the facts.
The Corporations Act 2001 (Cth) is an important act in the constitution of Australia that mainly deals with business companies and other entities. This act focuses primarily and mainly on the company itself and how its internal affairs are managed (Symes 2003, p. 133). This is the main act that governs the affairs of corporations in Australia and it considers the duties of directors, board members and the running of the company. There are approximately five volumes within this act and some of them directly relate to this case study. For instance, chapter two in volume one of this Corporations Act deals with the duties of officers and employees (Symes 2003, p. 133). This chapter outlines what is expected of an employee as well as any other top executive of the company. What’s more, this chapter also details what is expected of directors and the course of action that should be taken in case they breach their duties (Varzaly 2015, p. 281).
Additionally, chapter seven of volume four of the Corporations Act focuses on the financial markets, audits and services of the company. This law would apply very well in the case of Stacey, who was the financial director of the company but failed to conduct a financial forecast before venturing into Fiji.
Identify and discuss at least two relevant cases.
The two cases that are highly relevant to this case study are the case of McKillen v. Misland Investments Limited and the case of ASIC v. Rich. In the case of McKillen v. Misland Investments Limited, the complaint presented the petition that three directors of his company had breached their company duties (Varzaly 2015, p. 281). This breach occurred because one of the directors appointed a family member to head a crucial position in the company. Consequently, this created a conflict of interest because both of these directors were more focused on enriching the family name than being concerned with the affairs of the company. This breaches the duties of directors code which clearly stipulates that directors should be highly professional and ensure there is no conflict of interest in the company (Barber 2014, p. 29).
On the other hand, the ASIC v. Rich case also dealt with directors who breached their duties. Four of these directors withheld important and vital financial information from the rest of the board members. This information was very useful because it would have assisted the company to make better investment decisions.
Consider whether there are any defenses available to any of the directors.
In the case of Nature Now Pty Limited Company, there is no form of defense that is available to any of the three directors. This is because Yasmin, Stacey and Wes were appointed to their positions and are required to know what is expected of them as company directors. Yasmin was the managing director and she should have made the right decisions when it comes to the well-being of the firm. Likewise, Stacey being the financial director of this company should have prepared financial reports before venturing into the expansion of their camping proposal.
Part B: Discuss whether Nature Now Pty Ltd is bound to the loan contract with Bank Ltd.
Questions and Hints
Discuss companies’ relations with outsiders. (Do NOT discuss directors’ duties in Part B).
Loans form part of the most fundamental source of funding for a company or corporate entity. Many companies find themselves borrowing money from a bank or any other financial institution that is willing to lend money (Adams 2015, p. 30). This procedure is a very delicate one and it deserves to be handled in the most sensitive manner. This explains why there are certain rules and codes that govern the process of banks lending to companies and vice versa (Teele and Ramsay 2015, p. 173). In this case, Wes was a non-executive director who approached Bank Ltd for a loan. He was the sole director who was available since Yasmin and Stacey had gone for a company trip to Fiji.
The loan contract that was signed by Wes could be considered as being null and void for a number of reasons. Essentially, this also means that the Nature Now Pty Limited Company is not legally bound to this contract that Wes made with the bank. To begin with, this contract was signed without the compliance of the stipulated laws when it comes to company borrowing (Teele and Ramsay 2015, p. 173). The company law states that at least two directors should be present before any contract that binds the company should be made. In this case, it means that at least Stacey or Yasmin should have been present at Bank Ltd so that they would provide their approval signatures for the loan to become legal (Teele and Ramsay 2015, p. 173).
What’s more, the directors should have presented proof that the loan was really necessary and required to fund the activities of the firm and its plan to expand to Fiji. The loan amount of $600,000 was too huge for the firm to take, without them being really sure of the market situation in Fiji. Moreover, the decision of a company borrowing from an external source requires to be deliberated during a company meeting. This means directors and stakeholders should vote in favor of the company taking the loan or not (Adams 2015, p. 30). All these procedures were not correctly followed and this makes the Nature Now Pty Limited Company not to be bound to the loan contract with Bank Ltd.
Identify relevant sections of the Corporations Act 2001 (Cth) and apply these to the facts
The Corporations Act 2001 (Cth) clearly states that companies have two main ways of raising funds for financing their business activities. The main one involves borrowing from banks while the second is the selling of company shares to potential investors (Symes 2003, p. 136). This act goes ahead to stipulate that companies should choose the most viable options for obtaining extra monetary resources. Additionally, this Corporations Act also provides an analysis of the different laws that apply to the preferred mode of financing. Section 124 of this act states that companies are empowered by the law to borrow money through any of these avenues (Varzaly 2015, p. 284). What’s more, the company directors are purely and solely responsible for the outcomes of the decisions made to borrow money from external sources. In addition, Section 231 outlines the obligations of the contract that should characterize a company contract that aspires to be used to obtain external funding.
In the case of Nature Now Pty Limited Company, this corporations act should have been used to analyze and evaluate the most viable option to obtain funding for the expansion of the company’s operations. The non-executive director or Wes was highly aware of the fact that the company was not in a good position to repay or service a loan of $600,000. What’s more, the company had not determined whether the proposal of expanding to Fiji would have profited the firm or not. Section 283 of this act is also clear and illustrates how companies can obtain funding from other sources (Varzaly 2015, p. 284). Therefore, the corporations act is very clear on the numerous alternatives that are available for a company in case they desire to obtain additional funding Company Law Assignment Essay.
Identify and discuss at least two relevant cases.
There are numerous cases that exist concerning how companies have obtained loans from banks or other financial institutions without the ability of repayment. The cited cases for this essay are Fiorillo v. Krispy Kreme Doughnuts Company and the case of Aronowicz v. Emtwo Properties Company (Teele and Ramsay 2015, p. 176). The former case dealt with one of the company directors who made the sole decision of raising money for the company without informing the rest. The director thought that the sale of shares would have been the most suitable way of raising money that the firm wanted in order to expand its company activities (Hayne 2014, p. 798). Consequently, shares were issued, but the sales that were made only benefited the accused. Therefore, the company did not profit from this decision and this affected the profile of the company (Teele and Ramsay 2015, p. 176).
The second case of Aronowicz v. Emtwo Properties Company dealt with a loan agreement where the defendant agreed to secure a loan and repay it within a given period of time. The petitioner drafted all the necessary legal papers and contracts that the said company signed and promised to honor the deal (Hayne 2014, p. 798). Surprisingly, it turns out that this decision was made without proper consultation with all the directors or stakeholders of the company. The financial statements of the Aronowicz’s company indicated that the firm was not in a very liquid state to borrow money from external sources (Teele and Ramsay 2015, p. 176). Company Law Assignment Essay These two cases exemplify the consequences of directors breaching their duties and costing the operations of the firm. Likewise, the Nature Now Pty Limited Company also breached a number of company policies due to the negligence of its directors. This resulted in one of the directors signing a shady deal that the company could not finance. Conclusively, companies should endeavor to ensure that the directors that are appointed to manage the affairs of the company are highly competent and proficient (Adams 2015, p. 32). This can prevent the frequent breaches of the duties of directors that end up costing the firm both financially and resource wise.
References
Adams, MA 2015, ‘The unavoidable norm: Conflicts of interest by officers’, Governance Directions, 67, 1, pp. 30-32, Business Source Complete, EBSCOhost, viewed 3 September 2015
Barber, F 2014, ‘Indirectly Directors: Duties Owed Below The Board’, Victoria University Of Wellington Law Review, 45, 1, Pp. 27-51, Academic Search Premier, EBSCOhost, viewed 3 September 2015
Hargovan, A 2014, ‘Golden handshakes and breach of directors’ duties’, Governance Directions, 66, 5, pp. 278-280, Business Source Complete, EBSCOhost, viewed 3 September 2015.
Hayne, Km 2014, ‘Directors’ Duties And A Company’s Creditors’, Melbourne University Law Review, 38, 2, pp. 795-817, Academic Search Premier, EBSCOhost, viewed 3 September 2015
Lowry, J 2012, ‘The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors: Australian Securities and Investments Commission v Healey’, Modern Law Review, 75, 2, pp. 249-260, Academic Search Premier, EBSCOhost, viewed 3 September 2015
Symes, CF 2003, ‘A new statutory director’s duty for Australia — a ‘duty’ to be concerned about employee entitlements in the insolvent corporation’, International Insolvency Review, 12, 3, pp. 133-145, Business Source Complete, EBSCOhost, viewed 3 September 2015
Teele Langford, R, & Ramsay, I 2015, ‘Directors’ Duty to Act in the Interests of the Company: Subjective or Objective?’, Journal Of Business Law, 2, pp. 173-182, Business Source Complete, EBSCOhost, viewed 3 September 2015
Varzaly, J 2015, ‘The Enforcement of Directors’ Duties in Australia: An Empirical Analysis’, European Business Organization Law Review, 16, 2, pp. 281-319, Academic Search Premier, EBSCOhost, viewed 3 September 2015 Company Law Assignment Essay
Purpose
To enable you to apply problem solving skills and to research duties owed by company directors.
It is important for you to have time to think through how to structure and present arguments, and to review and discuss what the law is or should be in a particular area.
Whilst discussion with others is encouraged, the final piece of work must be your own.
Word Limit
2,300-2,500 in total (assignments exceeding the word limit may not be marked and may be returned to the student for re-writing; assignments less than the required length will risk not covering the topic adequately and may result in a fail). Do not include synopsis, references or bibliography in the word count.
Required
Read the fact situation below and complete the tasks in Part A and Part B.
SUPPORT YOUR ANSWER WITH REFERENCE TO RELEVANT CASES AND LEGISLATION.
Nature Now Pty Ltd organises ‘environmental awareness’ getaways in various locations around Australia. It specialises in weekend retreats that involve camping and bushwalking activities that build respect for nature. Many businesses pay $1,000 for each of their employees to attend a Nature Now weekend retreat.
There are three directors of Nature Now: Yasmin (Managing Director), Stacey (Financial Director) and Wes (a non-executive Director). When they started the company in February 2008 they sought advice from an accountant friend of theirs, who suggested that no director should have the capacity to bind the company to contracts worth more than $60,000. This limitation was written into the company’s Constitution.
Yasmin and Stacey control the business, and Wes, who is Yasmin’s boyfriend, has little interest in the company and little knowledge about its affairs Company Law Assignment Essay.
The three directors each hold 20% of the shares of the company, and there are several non-director shareholders who hold the balance of the shares.
Yasmin, Stacey and Wes regularly hold directors’ board meetings. During a meeting in July 2014, the directors consider the following proposals:
That the company should enter into a contract to purchase camping equipment imported by Outdoors Pty Ltd, a company wholly owned and controlled by Yasmin and Stacey. The price for Outdoors Pty Ltd’s equipment is twice that of Nature Now’s current supplier.
That the company should expand into Fiji.. Yasmin and Stacey believe Fiji. is a great untapped market. Neither Yasmin nor Stacey provide any financial forecasts or legal information about the proposed expansion into Fiji..
Yasmin and Stacey vote in favour of the above proposals. Wes initially displays some doubt, but a stern look across the board room from Yasmin silences him, and he also votes in favour of the proposals.
In the period after this meeting, Wes becomes increasingly unhappy with his passive role in the business. He decides to show how useful he is to the company, and while Yasmin and Stacey are on a business trip to Fiji. in September 2014, he approaches Bank Ltd for a loan of $600,000 to finance Nature Now’s expansion into Fiji. Wes knows the bank staff because he has occasionally deposited Nature Now’s weekly takings into the company’s account Company Law Assignment Essay.
Wes signs a loan agreement with Bank Ltd, writing his name next to the words
‘director of Nature Now, for and on behalf of Nature Now’. When the bank’s accountant asked for another director to sign as well, Wes explained that this was not possible as both Yasmin and Stacey were unavailable and could not be contacted because they are in a remote location. He also went on to say that ‘financing the expansion into Fiji is urgent’.
The bank’s lending officer was reluctant to approve the loan as it was a large sum for Nature Now but Wes convinced him it would be alright.
Unfortunately, during their trip, Stacey and Yasmin discovered that Fiji’s government imposes heavy legal restrictions on companies operating adventure activities. It is clear to them that Nature Now would not be able to obtain the necessary government approvals to operate in Fiji. The proposed expansion cannot proceed.
Because of this, and because Nature Now is now paying twice the price for camping equipment that it used to, the company’s financial situation deteriorates and it can no longer meet its repayment obligations to Bank Ltd. At a directors’ meeting, it is decided that Nature Now would argue that the loan contract was not valid as Wes had no authority to make it Company Law Assignment Essay.
Part A (20 marks)
Consider the actions of the directors of Nature Now Pty Ltd, and discuss whether any of them are in breach of any of their directors’ duties.
Hints
Consider each director separately.
Identify relevant sections of the Corporations Act 2001 (Cth) and apply these to the facts.
Identify and discuss at least two relevant cases.
Consider whether there are any defences available to any of the directors.
Part B (10 marks)
Discuss whether Nature Now Pty Ltd is bound to the loan contract with Bank Ltd.
Hints
Discuss companies’ relations with outsiders. Do NOT discuss directors’ duties in Part B
Identify relevant sections of the Corporations Act 2001 (Cth) and apply these to the facts
Identify and discuss at least two relevant cases. Company Law Assignment Essay
