Issue: the issue about company’s constitution and whether the loan contract between ABC bank and Sambal Pty Ltd is invalid.
State the law:
Section 140 of the corporations act states that:
“A company’s constitution (if any) and any replaceable rules that apple to the company have effect as a contract: (a) Between the company and each member; and
(b) Between the company and each director and company secretary; and (c) Between a member and each other member;
Apply the law:
According to section 140, a company’s constitution is only an internal governance rule, it cannot be enforced by outsider and also cannot be used and act between a company member and an outsider (Corporation Act, 2001).
In this case, Sambal Pty Ltd has a constitution, which restricts the amount of money the company can borrow at any one time to $10m. So, as a director of Sambal Pty Ltd, both Jim and Peter require compliance with this internal governance rules (maximum borrow $10m at one time), however, the directors who had been authorised by the board had borrowed an extra $2m loan from ABC Bank this time. Well, at the same time, section 140 is important in determine that the consequences of a failure, by some person who is bound by them, to comply with the internal governance rules. This means the liability should be undertook by the directors.
State the law:
Section 125(1): if a company has a constitution, it may contain an express restriction on, or a prohibition of, the company’s exercise of any of its powers. The exercise of any of its powers, the exercise of a power by the company is not invalid. 125 (2): if a company has a constitution, it may set out the company’s object. An act of the company is not invalid merely because it is contrary to or beyond any objects in the company’s constitution. Section 126(1): a company’s power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company. The power may be exercised without using a common seal.
Apply the law:
Companies that act outside their capacity are said to have acted “ultra vires”. According to section 125, company’s exercise goes beyond to a company’s constitution will not invalid. That means, although the company’s action goes beyond the constitution, the action will still valid. So, the $2m loan contract between ABC bank and Jim and Peter will still valid. The company should pay the interest that related to $2m loan (Corporation Act, 2001). Moreover, the person who breaches the company’s constitution may be liable for damages (if any) to other shareholders. In this case, the two directors Jim and Peter should be responsibility to their act and bear the damages to other shareholders (Corporation Act, 2001).
In this case, ABC bank do not have any liability. Sambal should give interest for the $2m loan to ABC bank, and asks the two directors to bear all the damages of company’s other shareholders.
In this case, the shareholders of Rich Pty Ltd haven’t been paid a dividend related to their shares for 3 years. Susan who owns 25% shares of the company is one of them. She is convinced that she deserves better and yet, given no reasons, the board of directors refuse to pay a distribution of the company’s profit attached to her shares. Hence, the issue is whether or not the board’s refusal is in breach of duty. If so, what would be Susan’s remedy?
The laws applied in this case are:
a. The oppression remedy: Pt 2F.1
b. An injunction to prevent a contravention of the Corporations Act: s1324
S 232 of the Pt 2F.1 allows the court to provide a remedy to a member where the court finds that: the conduct of the company’s affairs, or
an actual or proposed act or omission by or on behalf of the company, or a resolution, or a proposed resolution, of members or a class of members of the company Is either:...
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